Graeme Jarvis is a Director of Westpac Institutional Bank Global Capital Markets Strategy group and a darn good trader. He is also one of Australia’s most thoughtful and analytical writers on the market.
Below are his thoughts on the probable market impact of Janet Yellen’s Dovishness for markets.
While he is talking about US interest rates his views are relevant for currency, commodity and stock traders.
Janet and the Foamy Seas (FOMC) took centre stage this morning and absolutely killed it. There was no confusion in their set. Everyone was tight and they left no doubt as to their intention and view of the US economy. So while you may not agree with their economic assessment and you may not agree with asset prices this morning you can’t disagree with clarity of their conviction.
Rates are staying lower for longer for longer for longer for longer. The approaching of and then the passing by of their targets for unemployment and inflation have no bearing on their view of interest rates at the moment. Those looking for a “Carney” moment got the absolute reverse. Rightly or wrongly (longer term I do think wrongly) Yellen told us last night that inflation is not a problem, inflation expectations are well anchored, so rates will stay appropriately loose until the economic rebound firmly takes hold.
In the press conference she reiterated her reiteration that inflation will gradually move toward 2%. The way she talks and the looseness of that talk has got me firmly believing that the Fed is not operating under an inflation ceiling construct. It is an inflation floor. History may judge the decision to be poor but we do not trade history. We trade the market in front of us and not the one we want in front of us.
There can be your amount of research papers that indicate that the labour market in the US is not that slack because of changes in the construction of the labour force or because it is the ST unemployment rate that matters not the LT one. All those papers are nice and may be proven valid. The most important thing to now know yet again is that Yellen sees the underutilisation in labour markets as still remaining significant. They will not look at CPI, they may not even look at PCE, they may now only focus on wage inflation. The laggingest lag thing from Lag town.
The change in dots caused a mini reaction despite Janet telling us to ignore them. Yes there was an upward drift of Foamy Sea members guesses where fed funds will be in 2016, but the important thing to note is the fact that they are guesses and that Janet told us to ignore them. As a counter to that point was the dramatic shift lower in how the Fed thinks the US economy will perform this year. They downgraded their change in real GDP from 2.8-3.0% to a staggeringly poor 2.1-2.3%. In addition the longer term fed funds rate was also lowered from around 4% to something around 3.75%.
If Jarvis is correct what this means for Australia is that it is going to be nigh-on impossible for the RBA to lower the Aussie dollar without a rate cut, the threat of a rate cut, or a huge rally in Aussie 3 year bond rates independent of rates in other countries.
For stocks, ad infinitum low rates mean the S&P 500 will continue to bathe in the glow. So any pullbacks will continue to be bought. So leaving aside individual issues such as those associated with the iron ore price Australian stocks should do okay in the months ahead.