YELLEN SPEAKS, STOCKS DO NOTHING: Here's what you need to know

Federal Reserve Chair Janet Yellen was on Capitol Hill on Tuesday, emphasising that the Fed will remain patient in raising interest rates and fielding questions from lawmakers in her first of two days of testimony.

Overall, markets seem to be in a holding pattern ahead of Thursday’s UK referendum vote on whether to remain in the European Union or leave.


  • Dow: 17,829, +25, (+0.1%)
  • S&P 500: 2,089, +6, (+0.3%)
  • Nasdaq: 4,844, +7, (+0.2%)
  • WTI crude oil: $49.70, -0.5%
  • 10-year Treasury: 1.7%

Janet Yellen

Federal Reserve Chair Janet Yellen was on Capitol Hill on Tuesday, presenting her semiannual monetary policy report before members of the Senate and fielding questions from lawmakers for a few hours.

On Wednesday Yellen will give the same prepared remarks before members of the House of Representatives.

Yellen’s prepared remarks were mostly the same as what was contained not only in her speech made in Philadelphia earlier this month ahead of the Fed’s latest monetary policy statement, but also the language contained in that statement.

The Fed’s broader monetary policy report, compiled by Fed staff, held a few interesting insights, among them that the Federal Reserve is taking note that stock prices remain expensive relative to historical levels. And while the Fed will likely never say anything more forceful than this about the price of a financial asset, it is worth noting that they at least have an eye on stocks.

Recall that in this same report back in the summer of 2014 the Fed warned about potential overvaluations in social media and biotech stocks.

In its policy report the Fed also noted potentially frothy conditions in the commercial real estate market, writing (emphasis mine):

Valuations in the [commercial real estate] sector appear increasingly vulnerable to negative shocks, as CRE prices have continued to outpace rental income and exceed, by some measures, their pre-crisis peaks. However, leverage in the sector does not appear excessive, and some evidence points to a recent reduction in risk appetite among CRE investors. Overall growth of CRE debt is moderate, and the ratio of debt backed by nonfarm nonresidential property to GDP is below an estimate of its long-run historical trend. In addition, according to the January and April results of the Board’s Senior Loan Officer Opinion Survey on Bank Lending Practices, banks tightened lending standards in the fourth quarter of 2015 and first quarter of 2016.

Recall that on Monday, Pimco warned of potential issues in the commercial real estate market, though both the Fed and Pimco appear concerned not so much about overall leverage in the system — which was a major problem as the financial-crisis unfolded — but illiquidity among investors in this space.


Everything is in a “new normal,” apparently.

Speaking on the company’s latest quarterly earnings conference call, Lennar CEO Stuart Miller said the low levels of housing stock we’re seeing in the US economy are part of a “new normal” that could see a perpetually under-supplied housing market.

Historical data would tell you that US housing starts should be running at 1.5 million unit rate, and right now we’re about 30% below that level. A certain logic would tell you housing starts have nowhere to go but up and to the right.

But in his comments, Miller touches on the idea — most notably captured by Conor Sen — that the labour market is considerably constraining the housing market with no real relief in sight. There are, simply put, too few construction workers that are too expensive for builders like Lennar to hire in an effort to relieve the supply constraints stressing the housing market.

Or as Miller said, “Land and labour shortages will continue to be limiting factors and will constrain supply and restrict the ability to quickly respond to growing demand while the mortgage market and higher rents will continue to constrain that demand.”


The UK referendum vote on whether to remain in or leave the European Union is slated for Thursday.

On Monday night, macro trading legend George Soros warned that a vote to leave the European Union could see the British pound fall by as much as 20%.

The latest polling from Survation out Tuesday indicated that the ‘Remain’ camp still leads the ‘Leave’ camp by one point (within the margin of error), but has lost some ground since its prior poll.

Again, the big moves we saw in stocks in Europe and the British pound on Monday seems to be the financial market re-adjustment ahead of the referendum after some polls over the weekend indicated the gap the ‘Leave’ camp had opened last week pulled back some.

On Tuesday the pound was little-changed and stocks in the US did nothing.

In her testimony on Tuesday, Fed Chair Yellen was asked extensively about the referendum and said only that a vote to leave the EU could have “significant economic repercussions.”

Hang in there for just a few more days folks, then we can stop talking about this. Sort of.


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