Originally published by Rivkin Securities
Several interesting monetary policy related developments occurred last night starting with Federal Reserve Chair Janet Yellen’s testimony to the House Financial Services Committee. Yellen stated that rates don’t have much further to rise to get back to a neutral rate which hits that the Fed’s rate hiking cycle may be closer to the end than to the beginning. Yellen still expects the balance sheet normalisation process to begin this year (essentially the reversal of quantitative easing) but this is anticipated to be a very slow process. Although Yellen didn’t mention it explicitly, markets are still pricing in a high chance of at least one more rate hike by the end of the year.
Also on the monetary policy front, the Bank of Canada raised interest rates by 0.25% to 0.75% as widely expected. The hike was the first in seven years for Canada and makes it the second developed economy to begin hiking rates. Canada’s economy is quite similar to Australia’s in that it is heavily resources focussed and it has been experiencing a house price boom in its major cities. Although Canada’s inflation rate is still below the central bank’s target, the Governor pointed at that there can be a lag to the effects of monetary policy on inflation and therefore central bank’s must base their policy on future inflation expectations.
The major US, UK and German stock indices were up overnight with Germany’s DAX leading the pack with a 1.5% gain. The gold price initially spiked on Yellen’s comments but retraced the gains throughout the rest of the session to close almost unchanged.
Crude oil prices reacted to the Department of Energy data which confirmed another large draw in crude and gasoline last week which may indicate that the rebalancing process is proceeding as intended. After an initial spike higher, WTI crude prices trended down for the rest of the session as the market appeared to focus on the increased US production which is now at multi-year highs.
The S&P/ASX 200 is set for a higher open this morning based on futures pricing.
Data releases:
- US PPI m/m 10:30 PM
- US Unemployment Claims 10:30 PM