Yellen indicates that another hike is coming


Last week’s US Retail Sales and CPI data fell short of market expectations, which in turn saw the probability of a rate hike before year end decline from 78% to 73%. Fed Governor Janet Yellen has said repeatedly that the Fed is confused by the stubbornly low inflation prints, so data such as the CPI number is watched very closely by the market.


On Sunday, ahead of the Group of 30 banking conference, Yellen painted a bright outlook for the US economy and for inflation prospects in the coming year, as impacts of recent hurricanes would only have a minor and short-lived impact on growth, and that the economy tends to bounce back quite quickly from these types of events.


Her comments seem to suggest that the Fed is planning to hike rates once more before year end.With Yellen’s future as the Federal Reserve Chair in doubt, once her term ends in February, it is a widely held market view that she would like to get another hike done before she leaves.


Asked whether she thought that the elevated levels of the stock market, or increased budget deficits from the Trump tax cut plans create uncertainty in the Fed’s outlook, Yellen sidestepped the questions somewhat, noting that her staff describe the stock market valuation as ‘elevated’, but that markets need to be evaluated in a very different light from the last time they reached elevated status, as the banking system has been significantly improved since 2008.  She also noted that the proposed tax cuts have had a positive impact on consumer and business confidence, but have thus far had little impact on actual spending.


Aside from the uncertainty from market prices and budget deficits, there is the potentially damaging impact to economic performance from the NAFTA trade negotiations, which seem to be moving towards an impasse, as the US negotiators have made demands that both Canada and Mexico have stated are non-starters. Trump continues to threaten to walk away from the talks should he not get his way. However, leaders from the US Congress’s power Ways and Means Committee noted that the US constitution was designed with checks and balances to prevent one arm of government from forcing its will on another, and that Congress will stand up against Trump should he try to tear up the trade agreement. Therefore while it will continue to make headlines, the NAFTA situation is unlikely to have an actual impact on US GDP in the short run.


We continue to expect that a rate hike is coming from the Feb in December, which will continue to buoy the USD.


Author: John Glover


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