The financial markets welcomed Janet Yellen’s testimony to Congress on monetary policy with open arms yesterday, embracing the continuity between a Bernanke-led FOMC and the new Yellen-influenced regime.  There were not a lot of surprises in either Yellen’s prepared remarks or her Q&A period, reiterating her pledge to continue tapering absent a notable change in the outlook, and that rates would remain low well past the 6.5% threshold (which in fact is becoming more watered down the longer it stays in place.)
Equities were quite happy with Yellen’s message that the disparities in the labour market were still largely viewed as cyclical problem, and the FOMC continues to see higher asset values as an important foundation for economic growth. As such, even with the continued scaling back of asset purchases, the Fed is not yet prepared to abandon financial markets, with an accommodative stance towards rates and forward guidance as the main tool of making sure the recovery doesn’t falter.
Investors used the guidance from Yellen as an opportunity to increase their exposure to equities, with the S&P rallying to finish the day higher by 1.11%, while the DXY managed to claw its way off its earlier lows to end the session essentially flat.
The CAD had a strong day against its American counterpart, causing USDCAD to grind lower throughout the afternoon as traders looked to increase positions in high-yielding assets.
The release of the Canadian 2014/2015 federal budget did little to move markets, with the majority of the good news in regards to the country’s fiscal position already baked into markets after Finance Minister Flaherty’s press conferences last week.
Despite some of the positive fiscal developments already being discounted, the lower than expected deficit in 2014 and the higher than expected surplus in 2015 helped give the Loonie a marginal lift, especially considering it is likely Canada will return to a balanced budget in 2014 if the government isn’t forced to use the $3bn they have put aside in case of unexpected emergencies.
While the minutiae of the budget will no doubt be debated by economists and political heads, the overarching concept is that the Canadian economy is on track for a clean surplus in 2015, which gives the government room to maneuver should there be any external shocks which cause the recovery to falter; an excellent position to be in considering the potentially bumpy road ahead in terms of economic growth.
Turning our attention back to Washington, in a somewhat surprising turn of events, the House passed a clean debt ceiling bill yesterday evening without letting the decision come down to the wire and a near default of the US treasury.
With the Democrat-controlled Senate the bill is almost an assured passage, now paving the way for continued spending without incident until March 15, 2015.
The Republicans are obviously not happy with the lack of fight surrounding this debt limit increase, and with almost all of the Republicans voting nay for Boehner’s clean bill (28 yea vs. 199 nay), the tea party is beating the war drum and looking to replace their speaker with one who better represents the overall interests of the party – insuring the saga in Washington will continue.
The overnight Asian session was concentrated on Chinese trade data which increased by a larger margin than had been expected, leaving a trade surplus of $31.9bn, the widest level for January since 2009. Exports increased by 10.6% on a y/o/y basis (vs. expectations of 0.1% growth), while imports rose by 10.0% (vs. expectations of a 4% increase), with the level of imports for crude oil, iron ore, copper at all-time highs for January. While on face value the data seems to dash any concerns the industrial giant is slowing down, the divergence between figures reported in Taiwan and South Korea raise red flags that the data for January could have been skewed by importers looking to stockpile resources ahead of the Chinese New Year, along with exporters over-invoicing to take advantage of kick-backs. The AUD and CAD both popped higher on the encouraging commodity import data, but have since faded the majority of those moves as traders and investors scrutinize the validity and sustainability of the numbers. AUDUSD is still managing to hold its head above the 0.9000 mark, while the Shanghai Comp finished its session up by 0.3%.
Over in Europe, the EUR is attracting a strong offer tone this morning, hit by a wave of selling interest after European Central Bank member Coeure said the ECB was “very seriously†considering a negative deposit rate. The assertion that there is pressure from other members on the board of the ECB to get more accommodative on monetary policy has sent EURUSD into the high-1.35s, down by 0.45%. The GBP on the other hand is happily attracting willing bidders as money flows out of the common-currency bloc, with the Sterling on the rise this morning after Mark Carney and the Bank of England held tight on their 7% unemployment threshold for forward guidance, but confirmed that market expectations of a rate hike in the second quarter of 2015 were in-line with the bank’s aim of keeping inflation at 2%. Carney stopped short of going outright bullish in terms of upcoming rate hikes, and mitigated his statements by saying that when the first interest rate hike does occur, the increases in borrowing costs will be rolled out in a gradual manner. In addition, Carney said that he would not risk the recovery by raising rates prematurely, and that the BoE would take into considering a wide variety of economic measures that track excess slack in the economy as part of their forward guidance moving ahead. Cable is up over half a percentage point this morning, probing its way into the mid-1.65s ahead of the opening bell.
As we head into the North American open, a lack of economic data in the West has equity futures unchanged this morning. The Loonie is also meandering into the North American hand-off flat against its American counterpart, with the slashing of CAD short positions keeping the USDCAD pinned around the 1.1000 level. Front-month WTI is looking comfortable trading in close to the $101/barrel level after the better than expected trade data from China, with copper also putting in some heavy gains that have pushed the commodity up by 1% this morning.
Looking ahead to tomorrow, the main event on the economic docket will be the release of retail sale figures for the American economy in the month of January. Expectations are for a flat headline reading when compared to December, with a slight increase in the core reading at an increase of 0.1% over the month. As long as there isn’t a large drawdown in the rate of growth compared to December, the market will likely take this release in stride, with anything being released close to the median estimate as a sign the US consumer is still plugging away.
Further reading:
EURUSD
EUR/USD Feb. 12 – Rangebound as Eurozone Industrial Production Slides
