Stocks flat As Bond Rates And The US Dollar Lift

 | Oct 17, 2016 12:07

Originally published by AxiTrader h2 Quick Recap/h2

The US dollar and US rates were higher to end the week after Janet Yellen signaled the Fed might run the economy hot. That's potentially a game changer for valuations in markets. Naturally it will evolve through time but there are very important macro impacts of this if the policy is indeed pursued by the Fed, and other central banks.

It's too early to tell yet. But traders have initially reacted as though Yellen's thoughts will ultimately become action.

h2 What You Need To Know/h2 h3 International/h3
  • Stocks in the US closed flat but bonds sold off with the curve steepening again and the 10 year Treasury finishing the week at 1.79% - the highest weekly close since May. At the close of play the Dow Jones Industrial Average was up 0.22%, the Nasdaq 100 finished essentially flat, with the S&P 500 also largely unchanged at 2132.
  • The big story was Janet Yellen’s speech in Boston which shock up the paradigm traders and investors have been using to look at markets, the economy, and the Fed. If you recall earlier this year Yellen and a few other Fed speakers floated the idea that because monetary policy is able to deal with an economy that is running fast or inflation which is rising in a more effective manner than if growth is sluggish and inflation low. It was used as an excuse as to why the Fed was happy to hold fire on rate hikes in the face of global uncertainty even though it had signalled that rates needed to rise.
  • On Friday Yellen took that a step further saying perhaps the Fed needs to run a “high pressure economy” where the economy runs hot with a tight labour market and strongish growth in order to entrench a stronger economy. In many ways it’s a signal that like the BoJ the Fed sees the path toward a sustainable recovery as being credibly irresponsible.
  • Bond traders didn’t miss the import the curve steepened and the 10’s finished at their highest since May. They look like they are on the way to 2% or there abouts. Here’s the chart from my Eikon Terminal.