Global Daily – Yellen sticks to course

by: Nick Kounis , Peter de Bruin

140212-Global-Daily-Insight.pdf ()
  • Fed Chair Yellen strikes relatively positive tone and suggests tapering will continue
  • US NFIB survey paints upbeat picture of labour market and capital spending
  • House of Representatives passes vote to suspend debt limit until March 2015

Yellen sticks to view on outlook despite data disappointments and EM wobbles

The new Fed Chair Yellen struck a relatively positive note in her monetary policy testimony to the House Financial Services Committee, while also signalling continuity in the FOMC’s approach to monetary policy under her watch. As such, she emphasised that a tapering of asset purchases in ‘measured steps’ would likely continue. This reflected that the economic recovery gained greater traction in second half of last year and this had fuelled further progress in the labour market. Apparently recent softer data had not changed the Fed’s view of the outlook. In addition, although she and her colleagues had been watching recent volatility in financial markets closely, their judgement was that ‘at this stage these developments do not pose a substantial risk to the US economic outlook’. At the same time, the Fed Chair also made it clear that rate hikes are some way off, noting that the recovery in the labour market is far from complete, with the unemployment rate still well above levels consistent with maximum sustainable employment. In addition, she pointed out that those unemployed for more than six months made up an unusually large proportion of the total. Furthermore, the number of people working part-time, but that would prefer a full time job, remains very high. As such, the Fed was looking beyond the unemployment rate in judging the health of the labour market. This explained the Fed’s view that ‘it is likely be appropriate to maintain the current target range for the federal funds well past the time that the unemployment rate declines below 6.5%‘. Given that the unemployment rate is now very close to the threshold, that is not much of a surprise. However, we continue to suspect that the FOMC is too optimistic about the ability of monetary policy to solve the problems in the labour market and it may encounter supply-side constraints earlier than it expects, which could see rates going up earlier than it is signalling (though still not before mid-2015). This would follow an end to QE in the autumn of this year. Financial markets saw the testimony as being somewhat less dovish than expected, with implied rates on short rate futures and Treasury yields moving higher. The dollar was supported and equities reacted positively after an initial dip. Perhaps this confirms the view that risky assets tend to do well despite less policy accommodation, as long as the policy change is driven by stronger economic growth.


More confident small businesses plan to step up hiring

The NFIB Small Business Optimism Index rose by 0.2 points to 94.1 in January. This marked the third consecutive rise and was better than the consensus forecast of no change. The details of the report confirmed that small businesses are becoming more confident. Granted, the actual capital expenditures sub-index fell by 5 points to 59, but this reflected that December’s number had been boosted by the expiration of a number of expensing rules. Still, apart from December, this marked the strongest figure since December 2007. Moreover, the hiring plans sub-index rose by 4 points to 12, which is the highest level since September 2007. Meanwhile, the report also pointed in the direction of disappearing labour market slack. Indeed, 38% of the firms reported few or no qualified applicants to fill job openings, while the compensation sub-index remained at its post-recession high.

House of Representatives passes vote to suspend debt limit

On Tuesday, the House of Representatives voted 221-201 to suspend the US debt ceiling limit until March 2015. The plan goes to the Senate where it is widely expected to raise the debt limit before the end of the month. The dollar edged higher after the announcement in early Asia morning. At the time of writing, equity futures in Asia also point to a positive start.