US Markets Tentatively Halted by Yellen

All eyes were on Fed Chair Janet Yellen yesterday in hopes that she would deliver some news, any news, that would sooth a jittery market. Well, it would be a stretch to say that investor fears were assuaged, but at least market’s didn’t follow through on Tuesday’s sharp trade lower. Given the climate investors have been wrestling with thus far in 2016, that is a victory of sorts. That victory came at the tip of a sword brandished by Chair Yellen that provided two edges to investors. On one hand she was considerate of market volatility in her testimony and to that end suggested that the next rate rise may be delayed. That said, she also made it clear that the Federal Reserve is not abandoning its commitment to tightening.

The balanced approach left both bears and bulls with a victory; effectively a stalemate and a flat market.

There is a brilliance to the approach taken by Chair Yellen yesterday in that she was and remains unwilling to yield ground on the necessity and central importance of staying the course on rates – regardless of the dysfunctional response dramatically on display in markets. This position effectively informs markets that the Fed has a mandate that remains above the fray of emotion and short term thinking. It also informs markets and investors that the Federal Reserve will not be pushed or bullied into a sudden shift in policy approach. Posturing has always been an enormously important component of the conversation between the Fed and markets. Of course the onus is now once again on the economy and the Fed.

Upcoming economic data will need to confirm the necessity of the anticipated interest rate narrative laid out by the Fed over the next year. We will need to see further economic expansion and insulation from global market turmoil and global demand stagnation.

More specifically the Fed will need to see further employment gains, advances in hours worked and wages. An added bonus would be another tick higher in the Labor Force Participation rate in coming readings. Very importantly, inflation pressure needs to emerge in labor costs, producer prices and other measures, away from real estate, as an irrefutable component of our ongoing expansion.

Chair Yellen’s testimony concludes today. It is highly unlikely that investors will hear anything that departs from the well scripted testimony laid out yesterday. The odds of a move by the Federal Reserve off the back of Chair Yellen’s Wednesday testimony slipped below 10%.

Markets spent much of the session in convincingly positive territory before succumbing to the momentum trade that effectively left markets mixed, on mixed volume.  The NASDAQ gained 0.36% while the Dow Industrials lost 0.62% and the S&P 500 (-0.02%) closed flat. Volume on the NYSE (-12.46%) continued the contraction that began on Tuesday. Volume on the NASDAQ inched fractionally higher by 0.51%. Consumer Discretionary (+0.94%) and Health Care (+0.72%) were the only sectors to post a gain yesterday. Otherwise, energy was largely flat as a result of crude’s stall and Communications (-2.62%) fell sharply.

Today’s Economic Calendar will be dominated by Chair Yellen’s concluding testimony on Capitol Hill.

As we head into Friday’s trade I suggest a couple of articles that sum up the themes that led the MSCI All-World Index to bear territory this week and specifically the role that central banks   have played in the latest market action. To receive Kenny’s Commentary by email on Tuesday morning I invite you to request it here or check back later in the week to get caught up.

Happy St. Valentine Day,

Patron saint of love, young people and happy marriages.

flickr Photo: faungg