The most important event of the day, if not week now that the monthly payrolls report has become meaningless in steering the Fed’s no-longer-US-but-Chinese-data-dependent-path, will be Yellen’s speech at the NY Economic Club shortly after noon local time.
As DB’s Alan Ruskin previews, this is an “an event that many hope will provide clarity on whether the market’s original interpretation of the FOMC dots/balance of risks/forecasts and Q&A in all its entirety, was as dovish as originally assumed; or, whether the subsequent more hawkish comments from various Fed officials was more in keeping with what the FOMC was trying to convey.”
Ruskin adds that, in the aftermath of yesterday’s sharp downward revision to the Atlanta Fed Q1 GDP Nowcast from 1.4% to just 0.6%, “just to complicate the message the most recent data (corporate profits, core PCE deflator and revisions to PCE) work in favor of a more dovish conclusion. While Yellen has already said the April FOMC is ‘live’, and she will probably reaffirm this, we do not expect her to emphasize or belabor the point.”
Some more problems Yellen will face when communicating with the market:
One difficulty she faces in saying anything fresh is that she will be ‘flying blind’ when it comes to the major March payrolls and ISM numbers ahead, which is a difficult position for a data dependent Fed. Even if this week’s data is stronger than expected, the Fed is going to have a very tough time lifting expectations of an April hike to an acceptable level to hike without shocking the market, given current probabilities of an April hike at 8%! The communication problem the Fed faced in their March FOMC messaging was that apropos the dots, most members were comfortable with the Fed signaling two rate hikes this year, but there are few signs that they wished to reduce the probability of a Q2 hike, most obviously in June.
It would not be surprising if Yellen’s view is that before hiking rates, the burden of proof is on i) employment in the next few months showing it is resilient to the recent shock in financial conditions, and, ii) that payrolls remains solid in the face of weakening profitability and poor productivity – see Figure 1 below).
This fits with watching and waiting out the March, April and May payrolls before acting next; unless the coming March data is extremely strong, and they want to seize any opportunity afforded by quieter international markets to tighten in April – which still seems unlikely.
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However, while Yellen’s speech will at best confirm how confused the Fed is, the real question is how the market will react during and following the Chairwoman’s speech. This is what Deutsche Bank thinks will happen:
Probably remaining very reluctant to price in an April hike, and therefore still working with a long enough period without worrying about Fed tightening to continue to foster some moderate follow through in the risk-on environment. This is suggestive of a restrained but risk positive initial reaction to Yellen. ‘Restrained’ in part because participants will wish to avoid getting whipsawed by key data at the end of the week.
In other words, if Yellen is merely trying to square off the confusion between data and recent hawkishness, she will lean on the dovish side, if only to continue the market rally. However, as Deutsche Bank adds, “if we look at the impact of past Yellen speeches on macro sensitive topics since she became Fed Chairperson, we find a typical underwhelming impact.”
The Tables of statistics below, shows among many things that:
i) The absolute changes in the S&P on Yellen speech days is a very modest 0.34%, or roughly half the median absolute adjustment on FOMC press conference days and less than a third of recent payroll days. The big risk on/off reactions usually occur on FOMC press conference days, and not in her testimonies or speeches.
ii) The median (not absolute median) shows that the S&P has had a median positive response to all of her Chairperson appearances when she talks macro topics, consistent with her perceived dovish credentials. However, the median for the S&P response when she is simply giving a speech is -0.2% including negative S&P days on her last two macro speeches. This compared with +0.56% median S&P gains on press conference days, when the FOMC sends multiple policy signals, inclusive of her Q&A.
iii) The 2yr yield is one of the better indications of whether in the past the market believed she was dovish/hawkish relative to what was priced in. Again for her speeches we have a median +2bp 2y yield change on the day, whereas the FOMC press conference days have a -3bp median close to close change on the day.
iv) As for the USD, median impact has been minimal for speeches and testimonies, but positive for the USD vs. the Yen (presumably risk positive), and negative for the USD versus the EUR on FOMC days in keeping with the 2 yr yield signal. There is nothing here to suggest USD bulls should be holding their breath in the hope of immediate significant USD support.
And here is the empirical data of what happens to risk assets following Yellen appearances:
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