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While you were sleeping: Gradual rate hikes ahead

Tuesday 7th June 2016

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Wall Street moved higher, while US Treasuries fell as Federal Reserve Chair Janet Yellen called for gradual interest rate increases but stopped short of offering a timeframe.

Wall Street advanced. In 2.38 pm New York trading, the Dow Jones Industrial Average gained 0.74 percent. In 2.33pm New York trading, the Standard & Poor’s 500 Index rose 0.65 percent. In 2.48pm trading, the Nasdaq Composite Index climbed 0.68 percent.

“I continue to think that the federal funds rate will probably need to rise gradually over time to ensure price stability and maximum sustainable employment in the longer run,” Yellen said, according to the prepared remarks for a speech Philadelphia.

A report last Friday showed that US employers added a mere 38,000 jobs in May, far below expectations and the smallest gain in almost six years.

"[T]he overall labour market situation has been quite positive. In that context, this past Friday's labour market report was disappointing," Yellen noted.

"Although this recent labour market report was, on balance, concerning, let me emphasise that one should never attach too much significance to any single monthly report," Yellen said. "Other timely indicators from the labour market have been more positive."

The Federal Open Market Committee is scheduled to start its next two-day policy meeting on June 14. After Friday’s jobs data, few expect policy makers to hike rates then.

Even so, Yellen’s lack of hints on timing on Monday—Yellen referred to a potential increase “in coming months” on May 27—means that a July hike remains on the table, Omar Esiner, chief market analyst for Commonwealth Foreign Exchange in Washington, told Reuters.

"The fact that she did remove that timeframe I think just suggests that June’s off the table, July is possible if the data cooperates," Esiner told Reuters. "She’s a little bit more upbeat in that respect than the Street and I think that was a main takeaway for me.”

Gains in shares of Boeing and those of Nike, trading 3 percent and 1.9 percent higher respectively, led the Dow higher. Shares of Home Depot dropped 1.8 percent, accounting for the largest percentage slide in the Dow in afternoon trading.

"The speech was slightly more hawkish than the market expected following last Friday’s number," Bipan Rai, executive director of foreign exchange and macro strategy at Canadian Imperial Bank of Commerce in Toronto, told Bloomberg. "Lack of follow through suggests that markets are somewhat sceptical, or there’s enough uncertainty in the speech itself to cap [US] dollar optimism."

In Europe, the Stoxx 600 Index finished the day with an advance of 0.3 percent from the previous close, bolstered by increases in mining stocks.

France’s CAC 40 index eked out a 0.04 percent gain, while Germany’s DAX index added 0.2 percent, and the UK’s FTSE 100 index rose 1 percent.

The British pound weakened amid indications Britons might favour a withdrawal from the European Union, commonly referred to as a Brexit. 

“Oil and commodities are better again and that’s helping stocks, but it will be a very volatile week with the Brexit vote coming closer and closer,” Michael Woischneck, who oversees about 300 million euros (US$341 million) at Lampe Asset Management in Dusseldorf, Germany, told Bloomberg. “People are interpreting there won’t be a rate hike after the jobs report Friday and for me that’s very complacent because we shouldn’t forget the longer-term trend.”

BusinessDesk.co.nz

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