Global equity markets rallied, with the Dow hitting a new high, the dollar gained and bond yields tumbled yesterday after Federal Reserve Chair Janet Yellen dampened growing expectations of more than one interest rate hike later this year.
In remarks to the House Committee on Financial Services, Yellen said the US economy is strong enough to absorb further gradual rate increases and the slow wind down of the Fed’s massive bond portfolio.
The testimony depicted an economy that is growing, albeit slowly, and continues to add jobs as it benefits from steady household consumption and a recent jump in business investment.
Given current estimates, the federal funds rate “would not have to rise all that much further” to reach a neutral level that neither encourages nor discourages economic activity, Yellen said in her prepared testimony.
Equities markets rose on the view the Fed’s monetary policy is not going to be as aggressive as some had anticipated, said Larry Hatheway, chief economist at asset management firm GAM.
“The Fed isn’t really going to upset the apple cart,” Mr Hatheway said. “There’s some softening here of what the Fed is going to do at least around rates. It doesn’t necessarily answer the question around its balance sheet.”
MSCI’s gauge of stocks gained 0.90 per cent while the pan-European FTSEurofirst 300 index of leading regional shares rose 1.64 per cent and emerging market stocks rose 1.10 per cent.
On Wall Street, the Dow Jones Industrial Average rose 130.65 points, or 0.61 per cent, to 21,539.72, above a high set July 3.
The S&P 500 gained 16.44 points, or 0.68 per cent, to 2,441.97 and the Nasdaq Composite added 57.55 points, or 0.93 per cent, to 6,250.86.
Bond yields, which move in reverse of price, fell sharply. The benchmark 10-year Treasury yield fell to 2.302 per cent , its lowest in two weeks, before paring some gains to trade at 2.3141. At the front-end of the curve, the two-year yield dropped as low as 1.331 per cent from 1.379 per cent on Tuesday and last traded at 1.3470 per cent. Germany’s 10-year government bond yield fell to 0.515 per cent.
The dollar, which fell against the euro soon after the release of Yellen’s prepared remarks, reversed course and was trading near session highs against the common currency, as government bond yields in the euro area fell. The dollar index rose 0.11 per cent, with the euro down 0.42 per cent to $1.1417. The Japanese yen strengthened 0.64 per cent to trade at 113.20 per dollar.
Spot gold was up 0.23 per cent at $1,220.11 an ounce.
Oil futures pared gains despite a bigger-than-expected decline in US crude stocks as the drawdown was not as big as reported by the American Petroleum Institute.
US crude inventories fell 7.6 million barrels last week, the US Energy Information Administration said, much more than the 2.9 million-barrel crude draw forecast but slightly less than the 8.1 million-barrel decline reported by the API.