As a ship sailing in the storm waiting for captain’s directions, global markets last week have been reacting wildly to several controversial news making Janet Yellen and all her colleagues of main worldwide central banks spend sleepless nights.

Looking at the current situation from an overall perspective, it cannot be denied that everybody is waiting for the Fed to provide guidance about the economy through the decision concerning American monetary policy scheduled next month. Somebody could argue that the burden should not be placed completely over Ms. Yellen’s shoulders. However, empirical evidence on Forex markets backs the idea that Mario Draghi (ECB president), not to mention Haruhiko Kuroda (Bank of Japan president), have nowadays relatively low impact with respect to Fed Chairman’s words.

The aim of this article is trying to disentangle the overall effects on capital markets caused by all the recent news in order to answer the question: will Janet Yellen confirm next month her decision of restrictive monetary policy in the US or not?
Yes

  • Employment data: average hourly earnings rose 0.3% on the month, taking the annual growth rate up to 2.5%. Average weekly hours worked edged up to 34.5 from 34.4 UniCredit→”The labour market has not lost any momentum and it is confirmed by extremely low jobless claims. The upward move in hourly earnings leaves the door for a June hike open. It is clear that we need more convincing numbers for it not to close.”
  • Futures market: prices adjusted for a:                                 4% chance of the Fed raising rates by 25bp in June         47% probability of any increase at all this year
No
  • Employment data: Non-farm payrolls rose by 160,000, 40 thousands below consensus forecast. The jobless rate held steady at 5%, in spite of a fall in the labour participation rate
  • Treasury 2 year note: the yield, which moves inversely to its price, was 2bp lower at 0.71% from 0.77% a week earlier signaling that investors are postponing timing of next US rate rise. BOAML→”We expect the Fed to hike once this year, in September, followed by another hike in March. Our view reflects weaker momentum in the data.”
  • Political factors: having seen the economy slowing in the UK as a result of uncertainty over the Brexit vote, the Fed will take into account a similar effect ahead of November presidential election. Moreover, with Mr. Cruz withdrawing his candidacy and Trump becoming the Republican candidate, the Fed will have to deal with the possible implementation of Trump’s recently declared prospects of replacing Janet Yellen and get creditors to accept less than full payment as a means to lower US debt level, while at the same time promising expansionary fiscal policies.

​Currency: the dollar hit an 18-month low against the yen of ¥105.52 on Tuesday. Similarly, the euro broke back above $1.15 for the first time since August. This shows how, no matter Draghi’s stimulus, only Yellen’s decision will determine exchange rate direction.

Gold and Oil: gold tracked dollar moves surpassing 1300$ an ounce for the first time since January 2015. Oil had a volatile session as market participants continued to weigh up the potential impact on supply of the devastating wildfire in Canada’s oil sands region.


Laporta Davide
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