While you were sleeping: Yellen signals caution

Wednesday 30th March 2016

Wall Street and US Treasuries rose, while the greenback weakened, after Federal Reserve Chair Janet Yellen flagged the central bank will “proceed cautiously” in raising interest rates.

"Reflecting global economic and financial developments since December, however, the pace of rate increases is now expected to be somewhat slower,” Yellen said in a speech to the Economic Club of New York. "Given the risks to the outlook, I consider it appropriate for the [Federal Open Market] Committee to proceed cautiously in adjusting policy."

“This caution is especially warranted because, with the federal funds rate so low, the FOMC's ability to use conventional monetary policy to respond to economic disturbances is asymmetric,” Yellen noted.

Wall Street rose. In 1.04pm New York trading, the Dow Jones Industrial Average added 0.3 percent, while the Nasdaq Composite Index climbed 0.9 percent. In 12.49pm trading, the Standard & Poor’s 500 Index increased 0.5 percent.

US Treasuries gained, pushing the yield on the 10-year note five basis points lower to 1.83 percent in early afternoon trading.

“Yellen reiterated that the Fed will proceed cautiously, and the market is finding comfort in that,” Richard Sichel, chief investment officer at Philadelphia Trust Co, told Bloomberg. “There were no surprises, and surprises are what normally sends the market going the wrong way. Investors can now start to key in on some economic numbers, and then begin to look ahead to earnings.”

The US dollar fell, sliding 0.5 percent to US$1.1249 per euro and weakening 0.4 percent to 113.03 yen.

Gains in shares of Coca-Cola and those of Home Depot, up 1.3 percent and 1 percent respectively in afternoon trading, led the Dow higher.

In the latest economic data, the Conference Board’s index of consumer confidence rose to 96.2 this month from an upwardly revised reading of 94 in February.

Separately, the S&P/Case Shiller composite index of 20 metropolitan areas posted a year-over-year gain of 5.7 percent in January.

“Home prices continue to climb at more than twice the rate of inflation,” David Blitzer, managing director and chairman of the index committee at S&P Dow Jones Indices, said in a statement. “While low inventories and short supply are boosting prices, financing continues to be a concern for some potential purchasers, particularly young adults and first time home buyers.”

In Europe, the Stoxx 600 Index ended the day with a 0.5 percent advance from the previous close. Germany’s DAX Index rose 0.4 percent, while France’s CAC 40 Index gained 0.9 percent. The UK’s FTSE 100 Index slipped 0.01 percent lower as miners slumped.

Barclays analyst Kevin Norrish warned prices for commodities including oil and copper might drop.

Copper may fall to the low US$4,000s a metric tonne, from US$4,945 in London last week, while oil could fall back to the low US$30s a barrel, Norrish said in a note, Bloomberg reported.

“Investors have been attracted to commodities as one of the best performing assets so far in 2016,” Norrish said in the March 28 report. “However, in the absence of any concerted fundamental improvements, those returns are unlikely to be repeated in the second quarter, making commodities vulnerable to a wave of investor liquidation.”

BusinessDesk.co.nz

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