Fed chair Janet Yellen’s speech at Jackson Hole has, with some well-timed help from her deputy Stanley Fischer, changed the outlook for global markets according to Marc Chandler, Brown Brothers Harriman’s well-respected head of currency strategy.
Writing on his Marc to Market blog, Chandler said: “With 17 simple words and the help of clarification from her deputy, Yellen changed the near-term dynamics in the capital markets.”
Yellen’s comment that “I believe that case for an increase in the federal funds rate has strengthened in recent months” placed her marker down, Chandler said.
That was so, even though markets were “initially confused” thinking Yellen was indicating a December, not September rate rise from the FOMC. Chandler said the implication was only one hike not the “two the June dot plots implied”.
Which is where Fischer’s CNBC interview was important in explaining “she implied no such thing”, Chandler says. “Nothing she said had ruled out a September hike or two hikes this year.”
The market took the hint, the odds of a September hike were shortened and traders are on non-farm payrolls watch to confirm or deny a rate hike if the data is strong – or not – when it is released Friday at 8.30am New York time.
So why does this all matter if the US dollar is only a little stronger, bonds a little higher and stocks hardly moved?
Because the risk of a Fed hike will change trader and investor’s behaviour. Here’s Chandler’s neat explanation why a September hike might be a big deal in the weeks ahead (our emphasis):
For most investors and market participants, it might not make a significant difference whether the Fed hikes in September or December. The Federal Reserve’s leadership has put the market on notice that it is coming. This is an example of transparency as well as taking into account the interests of other stakeholders. However, the increased prospects of a Fed hike may spur profit-taking in many summer rallies in risk assets, like the 16%+ rally in emerging market stocks since late-June, or the 11.25% rally in the MSCI World Equity Index of developed countries.
He could have added almost any asset class on the planet at the moment. All of them will be affected should the market start to really believe the Fed might not raise rates once this year, but twice.
That’s particularly the case for forex and commodities where the US dollar is such an important part of the underlying price setting regime.