World Week Ahead: Eyes squarely on Yellen

Monday 6th June 2016

Investors will scrutinise comments from US Federal Reserve Chair Janet Yellen after poor jobs data raised questions about the economy and practically ended bets on an interest rate hike at the central bank’s policy meeting next week.

Today Yellen is set to speak at an event in Philadelphia. A report on Friday showed that US employers added a mere 38,000 jobs in May, the smallest increase in almost six years. The Federal Open Market Committee begins its next two-day policy meeting on June 14.

Friday’s weak jobs data prompted traders to change their bets on a rate increase this month, now pricing in a 4 percent chance—down from 22 percent before the jobs data—and a 29 percent probability in July, according to Bloomberg.

Meanwhile, all 19 respondents in a Reuters poll of so-called primary dealers on Friday said the Fed would keep its benchmark interest rate unchanged in a range of 0.25 percent to 0.50 percent next week.

“We had thought that we were on track for a rate hike in June, but the employment data [on Friday] pretty much takes a rate hike off the table. It's not impossible, but it seems very unlikely," Tom Simons, money market economist at Jefferies and Co told Reuters.

Wall Street took note, with the Standard & Poor’s 500 Index ending Friday 0.3 percent lower from Thursday’s close, which marked the highest in seven months. The Nasdaq Composite Index closed lower for the first time in eight sessions.The US dollar dropped, while Treasuries climbed, pushing yields on the benchmark 10-year note 10 basis points lower to 1.70 percent.

“That was very disappointing and adds a lot of uncertainty to a market that was gearing up for a summer rate hike from the Fed,” Allan von Mehren, chief analyst at Danske Bank in Copenhagen, told Bloomberg, referring to the US jobs report. “It makes people question the real strength of the labour market. Really terrible timing, as confidence was just tentatively returning to the market.”

To be sure, Cleveland Fed President Loretta Mester, a voting member on Fed policy this year, said on Saturday in Stockholm that “the weak employment number has not changed fundamentally my economic outlook.”

"I still believe that in order to achieve our monetary policy goals, a gradual upward pace of the funds rate is appropriate," Mester told reporters, according to Reuters. “The timing of actually when the rate hikes would occur and the slope of that gradual path is data-dependent.”

In terms of fresh US economic data, this week offers reports on the Fed's labour market conditions index, due today; productivity and costs, and consumer credit, due Tuesday; weekly jobless claims, and wholesale trade, due Thursday; and consumer sentiment, due Friday.

“The broader question is whether the economy is gaining the kind of momentum and traction that we need for a market that has been looking toward new highs,” Quincy Krosby, market strategist at Prudential Financial in Newark, New Jersey, told Reuters.

"No one is out to suggest the economy is doing a major turnaround because of this number, but we now need to see a clutch of data that suggests that this is a one-off," Krosby noted.

In Europe, the Stoxx 600 Index posted a decline of 2.4 percent last week; the index fell 0.9 percent on Friday after the disappointing US payrolls data.

BusinessDesk.co.nz

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