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In the Greek myth Jason had to steer his ship, the Argo, through the Clashing Rocks of the Bosphorus. Earlier today Federal Reserve Chair Janet Yellen had to guide the central bank down a similarly dangerous route. But rather than a pair of clashing rocks, Mrs Yellen had to find safe passage between the bulls and bears who’ve been struggling to take control of equity markets of late. On top of this, she had to deal with turbulence from the House Financial Services Committee, members of which were out to throw her off course.

Ahead of the testimony investors were busy cutting back their short equity/long precious metals exposure and booking profits. This meant that some stability returned to the markets following a turbulent start to the week. There were hopes that Mrs Yellen would convince investors that any further rate hikes from the Fed would be taken at a measured pace, and certainly not at the rate of 25 basis points per quarter as inferred from December’s projections. At the same time, the Fed chair would have to assure market participants that all was well with the US economy. In other words, the economy is doing great, but not great enough to raise the Fed Funds rate to less than 1.5% by year-end.

When it came to it she said the usual stuff about the Fed making progress towards its objective of maximum employment and that the FOMC expects inflation to rise to its 2% objective in the medium term. But perhaps the most dovish (and therefore potentially bullish) part of her testimony was this:

“Financial conditions in the United States have recently become less supportive of growth, with declines in broad measures of equity prices, higher borrowing rates for riskier borrowers, and a further appreciation of the dollar.”

In other words, the economy is weakening. Yet the Fed raised interest rates in December for the first time in nearly ten years. This suggests that they won’t be prepared to hike again next month. However, this may not be enough to calm market fears between now and the next Fed meeting on 15th/16th March. After all, the bond market is already pricing in just one 25 basis point hike for the rest of 2016

Before attempting to pass between the rocks, Jason sent a dove on ahead to test out the journey. Legend has it that the bird came back minus its tail feathers. This convinced Jason that the Argo would make the journey successfully. She did, although like the dove she took some collateral damage to her rear end. It’s probably best to stop the analogy right there. 

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Spread Co is an execution only service provider. The material on this page is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by Spread Co Ltd or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

 

Posted by David Morrison

Tagged: Bulletin PM

Category: PM Bulletin


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