US Federal Reserve comments move markets

Share Markets: 

The US stockmarket weakened as comments from Fed officials fuelled speculation regarding an interest rate hike in coming months.

The Dow fell 0.3%, the S&P 500 slipped 0.2% and the Nasdaq was up 0.1% for the session.

Interest Rates: 

US government bond yields rose following comments from Fed officials at the Jackson Hole symposium, although it was Vice-Chair Fischer, rather than Fed Chair Yellen, who moved markets most.

US 10-year bond yields initially fell slightly on Yellen's speech, as she emphasised her data-dependency criteria for her comment that "the case for an increase … has strengthened."

Vice Chair Fischer's later comments, however, boosted bond yields as he indicated the September meeting was still in play for a rate hike.

The 10-year government bond yield rose from 1.57% to 1.63% and the two-year yield rose from 0.79% to 0.84%.
Market pricing of the Fed funds rate jumped, implying around a 40% chance of a rate hike in September, an 85% chance by December, and 100% by March 2017.

Foreign Exchange: 

The US dollar index rose by around 0.9% in response to the Fed comments. EUR fell from 1.1341 to 1.1187 at the time of writing.

The US dollar also strengthened against the Yen, with USD/JPY jumping from 100.50 to 102.14 earlier this morning, before edging back below 102.

AUD traded as high as 0.7692 just after the Yellen speech but fallen to a one-month low of 0.7548 currently, with Fischer's comments weighing.

NZD similarly rose to a 15-month high of 0.7380 before falling to 0.7221. AUD/NZD rose from 1.0420 to 1.0471 this morning.

Commodities:

The oil price edged up as investors weighed up the likelihood of a production freeze from oil producers.

Australia: 

There was no major economic data released on Friday.

Japan: 

The nationwide core consumer price index, which excludes volatile fresh food prices, fell by 0.5% in July from a year earlier. 

It is the fifth straight month of declines. And it is the biggest fall in more than three years as more firms delayed price hikes due to weak consumption, keeping the central bank under pressure to expand an already massive stimulus programme.

United Kingdom: 

GDP growth was in line with consensus expectations, rising 0.6% in Q2. For the year to Q2, the pace of GDP growth remained at 2.2%.

In Q2, private consumption rose 0.9%, gross fixed capital formation jumped 1.4%, while government spending slipped 0.2%.

United States: 

Fed Chair Yellen's address at the Jackson Hole symposium was notable for explicitly mentioning rate hikes: "the case for an increase in the federal funds rate has strengthened in recent months".

However, that was balanced by: "Our decisions always depend on the degree to which incoming data continues to confirm the Committee's outlook."

The inclusion of the word strengthened was new to the Fed's policy outlook and indicated a hawkish shift, but markets didn't really believe it until Fed Vice Chair Fischer spoke to CNBC.

He said Yellen's message was consistent with a rate hike in September (data-dependant, of course), saw evidence that the economy had strengthened during the past three months, and pointed to next week's payrolls report as an important gauge of that strength.

US GDP was confirmed at a subdued pace of growth of 1.1% annualised in Q2, down from a previous estimate of 1.2%. This was driven by weaker net exports and inventories. Personal consumption jumped 4.4% in annualised terms.
Consumer sentiment edged down to 89.8 in August from a reading of 90.0 in July, according to the University of Michigan measure.


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