US Federal Reserve chair, Janet Yellen has firmly put an interest rate rise on the global agenda, sending the US dollar rising, the Aussie dollar lower, and bond yields rising as prices fell.
Her speech on Friday night had been anticipated all week and she became the latest and most important of the Fed’s leadership to drag the timing of a rate rise from later this year or in early 2017 to as early as mid-June, or July at the latest.
Ms Yellen told a meeting at Harvard University in Boston that that the Fed was on track to raise its benchmark interest rate “in the coming months."
She said the Fed wanted to see evidence the economy was rebounding from a weak winter before it acted, but she added that evidence was beginning to pile up.
The big test will be this Friday night, our time when the May jobs report will be released. Analysts are looking for a total around the weak 160,000 new jobs reported for April.
A stronger report than that will see the rate rise a forgone conclusion, without only the looming Brexit vote in the UK the only reason to delay an increase to July, when the Fed will have more data, especially the June jobs report.
Besides the jobs report, the Fed will also have Consumer spending and income data to assess, its favourite inflation guide, the personal consumption expenditures price index, the Fed’s preferred inflation gauge (Tuesday), car sales for May, house prices for April, Consumer confidence for May and trade data on Friday.
“Growth looks to be picking up from the various data that we monitor, and if that continues and if the labor market continues to improve – and I expect those things will occur," then it would be appropriate to raise rates, Mr Yellen said.
Friday also saw fresh evidence that the US economy is improving after a slow start to the year, with March quarter GDP growth revised up to an annual growth rate of 0.8% from the first estimate of 0.5%. The second estimate though is still well under the 1.4% reported for the December quarter.
Ms Yellen’s comments sent the US dollar climbing by 0.6 % against a basket of six global currencies, adding to the biggest monthly gain for the greenback since November of last year.
The US currency ended around two month highs on Saturday morning, while the Aussie dollar slipped back under 72 US cents to close around 71.80 cents early Saturday.
US Treasury prices dropped with the yield on the 10 year bond – the global indicator – rising to 1.851% and the much-watched 2-year yield hitting 0.90%.
Gold prices slid as much as 1.1% and lost ground for the week (and for the 4th week in a row). Oil prices though rose by between 1.2% for Brent and 1.9% for West Texas crude futures in the US. Sharemarkets though continued to ignore the Fed’s jawboning and staged another rally, closing higher for the week. The Dow, S&P 500 and Nasdaq all had solid gains, with the S&P 500 staging its biggest weekly gain for two months with a gain of 2.3%.
In addition to her comments on the timing of any increase, Ms Yellen also pointed out that the recent stabilisation in oil prices — US crude hit the $US50 a barrel mark last Thursday, up from around $US27 to $US28 a barrel in late January and early February — should help to lift inflation that has remain stuck below the Fed’s 2% target.
She did emphasise that the US has more room to improve, noting that growth in output has been “remarkably slow” (as it has been around the world in the past 18 months or so) and that the US labour market still has a lot of slack, despite the jobless rate around the 5% level,or a bit lower.
The Financial Times and Bloomberg both point out that futures on the federal funds rate (the rate the Fed could shift next month), now point to a 54% chance of a Fed rate hike by the end of July, up from around 17% a fortnight ago.
Clearly markets are no longer concerned that the Fed could bite them hard via a rate rise. The question now is the timing of the third increase since the current cycle started last December.
