18th July 2017

Brooks Macdonald: Weekly Market Commentary - 17 July 2017

Yellen’s dovish testimony provides support for equity markets

Federal Reserve (Fed) Chair Janet Yellen surprised markets on Tuesday, when after weeks of a hawkish setup, she suggested that the Fed is not only uncertain about “when - and how much - inflation will respond to tightening resource utilization”, but also recognised that “inflation has been running under our (the Fed’s) 2% objective”. She added that “part of the weakness in inflation reflects transitory factors” and stressed that inflation will remain a key focus for the Fed in the near term. Yellen also reiterated Governor Brainard’s message delivered earlier in the week, warning that the federal funds rate may "not have to rise all that much further to get to a neutral policy stance", while suggesting that the committee are likely to move more cautiously on further increases in the Federal Funds Rate, so as to help guide inflation back up around target. In terms of balance sheet normalisation Yellen indicated that she expects the Fed to start reducing its balance sheet “this year” however failed to provide any further guidance as to when exactly that might be. 

Despite concerns over inflation, Yellen remained optimistic on the strength of the US economy, as reflected in the Fed's Beige Book, released Wednesday. All 12 Fed districts saw their economies expand over the survey period, as wages and inflation rose "modestly”, while the US economy was said to grew at a "slight to moderate" pace over the six weeks.

Overall, her testimony before a House committee on Wednesday was seen as dovish. The market implied probability of a rate rise at any meeting this year has now dropped below 50% with a rate hike at the February 2018 meeting now at a 58.2% likelihood down from 62.7% prior to the testimony. The 10-year yield also dipped, reversing some of the bond market sell-off seen over the last few weeks.  

UK unemployment falls further yet fails to bolster real wage growth

The job market continued to show resilience in May as the unemployment rate dipped further, by 0.1pp to 4.5%, its lowest level since June 1975 and its seventh consecutive month of declines. Job creation remained stable, driven equally by full-time and part-time jobs. Average weekly earnings growth slowed to 1.8% for the quarter compared to a year ago, and just 0.3pp below April’s figure. Growth in core earnings, however, accelerated broadly as expected, printing at 2.0% over the same period, marginally above expectations and +0.2pp from April. However, given May’s headline consumer price index (CPI) print, real core wage growth printed unchanged at -0.6% for the quarter compared to a year ago, marking a third consecutive month of negative real wage growth.

The data followed dovish comments from the Bank of England Governor, Broadbent, who stressed that the bank is “not yet ready to support a rate hike”, echoing thinking by the majority of the members of the MPC (including Governor Carney) who would prefer to see a sustained wage pressures before they join others in voting to hike.

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