Today marks the beginning of US Federal Reserve’s Chair Yellen’s semi-annual testimony on the economy and monetary policy before Congress in front of the Senate Banking Panel followed by testimony in front of the House Financial Services Committee. What does this imply? A number of things.
First of all Yellen is expected to keep all options open and reiterate the FOMC’s rhetoric that forward guidance will be data dependant. Secondly, apart from the much anticipated remarks covering the economic outlook, monetary policy, and regulatory reform, markets will be eagerly awaiting the subsequent Q&A session which is expected to shed more light on the FOMC’s key concern, i.e. that of low inflation and expectations of the next rate hike.
With ca. 38 central banks around the world already having announced looser monetary policy since the start of the year, and with the Fed’s inflationary woes waning, indications further delays in the Fed’s first rate hikes will therefore not really come as a surprise.
What is important to note is that, so far, since her appointment as Federal Reserve Chair on 03 February 2014, Yellen has had a relatively strong impact on markets in terms of instilling market confidence through the tone and content of her speeches. However, any failure this time round to meet market’s expectations following last week’s somewhat dovish FOMC minutes might result in a halt of the credit market rally witnessed over past weeks. And if that was not enough, we also have CPI data to contend with on Thursday, which, as Yellen made clear, will be a key determinant in the Fed’s short term monetary policy stance.
Meanwhile, markets reacted positively to news over the weekend that the ECB and Greece agreed on a 4-month extension to its current bail-out programme. However, despite the rally in markets, both fixed income and equity, it is noteworthy pointing out that the agreement is subject to the presentation of a list of reform measures required to meet conditions and a review of its current support programme.
From what has been made public, we do not see any significant differences from the existing one, but what is sure is that this extension will give Greece that much needed oxygen in setting its domestic policy priorities. What the Eurozone has survived, so far that is, is a Grexit, however going forward, we must not undermine the fact that the dispute between the Greek government and the Troika remains ongoing.
Elsewhere, the smaller-than-expected rise in the German Ifo index for February might indicate that businesses in the single currency region could be worried about Greek implications on the overall economy. To add to this, the Business Climate Indicator rose less than expected, however continues to point towards steady annual German GDP growth of around 1.5% as the weaker euro is yet to have a strong effect on German companies coupled with expectations that the impact of ECB QE could somehow mitigate fears over Greece.
On this note, the €60bn/month ECB QE program is scheduled to start next week, with an influx of monies earmarked for the said asset purchase programme. With Sovereign bond yields expected to be squeezed to the last drop, we expect European IG bonds corporates to benefit from the search for yield whilst also equity markets are expected to enjoy fresh waves of increased demand.
To this effect, with US yields higher against their European counterparts, and the US credit market significantly larger, we would not rule out investors shifting parts of their portfolio into USD denominated debt, as the USD market could well be supported by positive technical factors. Furthermore, we have also witnessed an increased trend of US corporates issuing in euros so far this year, in anticipation of ECB’s QE.
This article was issued by Mark Vella, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, views and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.