When previewing today’s Janet Yellen speech, we first focus on BofA’s chief economist Ethan Harris who looks not so much at today’s event as at recent appearances by Yellen and various Fed governors and president, and is clearly getting more disenchanted by the Fed’s ongoing flip-flopping, because as he says “it is fair to say that many clients are a bit confused and frustrated with Fed communication.”He continues:
The Fed seems to be constantly changing its focus from one meeting to the next. They seem to regularly promise hikes, only to back off at the last second. Fed statements often seem stale, reflecting where the economy and markets were a couple months ago, rather than current conditions. They say their 2% inflation target is not a ceiling, and yet they only plan to bring inflation back to 2%. They argue that the risks to the outlook are very asymmetric—with rates near zero they have limited anti-recession ammunition—and yet their inflation target is symmetric. This is policy transparency?
In light of the above one could say that the June rate hike odds are an efficient measure of the Fed’s overall credibility in recent months.
As we noted earlier, Yellen is the last scheduled Fed official to speak publicly before the quiet period Fed officials typically observe the week before a Federal Open Market Committee meeting. She’ll give remarks at the World Affairs Council in Philadelphia at 12:30 p.m. local time, then will attend a roundtable discussion at the West Philadelphia Skills Initiative starting at 2 p.m. The appearances give her a chance to talk July back onto the table by signaling that the June data may have been a blip. Alternatively, she could push expectations back further by emphasizing the negative developments.
Yellen could note that the May report does not necessarily suggest a more permanent gloom for the labor market, where unemployment at 4.7% is at its lowest level since the beginning of the recession. On rates, she could repeat her line from a week-and-a-half ago that a rise could be appropriate “probably in the coming months.” Millan Mulraine, deputy chief economist at TD Securities in New York, said he expects the Fed Chair to reiterate a “relatively upbeat outlook on growth and inflation, while continuing to emphasize the need for caution.”
While likely keeping a July rate hike on the table, Yellen “will emphasize that any decision to act will be highly data-dependent,” he wrote in a note to clients.
Another take of what to expect in today’s key speech comes from DB’s Jim Reid, who says that the weak jobs report “makes for an interesting appearance from Yellen as surely she can’t confidently signal a summer hike now? However she was relatively hawkish when she spoke 10 days ago at Harvard so will one number knock her back to her normal dovish leanings. The market has certainly voiced its opinion. We’ve had a big round trip in June and July hike expectations over the last month. Only 4 weeks ago the probabilities were 4% and 17%. They then climbed to a peak of 34% and 54% on May 24th before landing at 4% and 27% this morning.”
Still, anyone expecting a full dovish flip by Yellen was who quite humiliated by the payrolls report (confirming what Gundlach said originally that she should have been dovish), will be disappointed because as Bloomberg writes, “being opaque has been paying off for Janet Yellen. That’s one reason not to expect razor-sharp clarity as she speaks in Philadelphia later on Monday.”
Call it Yellen’s metamorphosis into a lite-version of Alan Greenspan.
Still, following her hawkish assessment of the economy 10 days ago, Yellen may need to update her tone slightly in response to renewed labor market uncertainty, perhaps softening or further qualifying her May 27 statement that an increase will probably be appropriate “in coming months.” That said, economists and strategists say it’s unlikely that she’ll give a more definitive timeline on when to expect the second hike in a decade.
Quoted by Bloomberg, Guy Lebas, fixed-income strategist at Janney Montgomery Scott who expects a September increase, said that “we’re going to get a vague promise of future rate hikes that does not specify a date,” said . “You can’t claim data dependence, have the most recent data be what it was, and still take upward rate action.”
Actually, the Fed can’t claim data dependence period, unless the ‘data’ it references is the Yuan exchange rate or the closing price of the S&P500. In the weeks leading up to the employment report Friday, several Fed officials had signaled that they were in favor of a rate increase in coming months. Markets were increasingly pricing in a hike at either the Fed’s June 14-15 or July 26-27 meeting as a result, but that reversed following the latest jobs data.
The result is shown in the chart above.
Most likely what Yellen will do is repeat the broad generalities she has reiterated for months: “The last thing Yellen wants to do is talk herself into a corner,” said Gennadiy Goldberg of TD Securities who expects Yellen to stick to her call for an increase in “coming months” while emphasizing that it depends on data holding up. “That was the beauty of Yellen’s recent remarks – it was enough to put the markets on notice, without painting herself into a corner if the data should sour.”
Actually she did paint herself into a corner considering July rate hike odds promptly surged to series highs in the hours following her last speech, only to tumble subsequently.
Girard and Kevin Cummins at RBS Securities expect Yellen to repeat her prior comments, hardly a precise signal. “She will stick to the script that a rate hike ‘in coming months’ would be appropriate if things unfold as the Fed expects, which could mean June, July or September,” they wrote.
No matter what Yellen says, however, the best news for the Fed is that the BLS just reset the recent drop in the Chinese Yuan, courtesy of its peg to the US dollar which just had a dramatic close encounter with gravity on Friday. As such Yellen just bought herself at least a few more weeks of breathing room before fears about Chinese capital outflows and sharp devaluations reemerge. It also means that, now that bad news is again good news, the S&P may easily hit new all time highs in the coming days even as US economic data finally cracks.
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