Yellen Hints Rate Hike Around the Corner

In what was viewed as tacit support for near-term rate hikes, Janet Yellen revealed that the Federal Reserve intends to raise interest rates at a gradual pace in deference to the growing chorus of calls, notably from the IMF, to hold off on more hawkish policies. However, policymakers are wary of holding off, as it may necessitate a quicker adjustment higher to policies, a situation the Federal Reserve would prefer to avoid especially after witnessing the impact of quick adjustments in China. Nevertheless, the market reaction to the comments was anything but smooth as evidenced by the losses in equities and commodities while bonds and the dollar were heavily bid. This raises the stakes for a September hike amid an uptick in volatility and likelihood that economic data will continue to prove mixed as the Fed carefully eyes the inflationary outlook. Gold continued to retreat, trending back below $1150 on the back of dollar strength.

Despite the obvious difficulty in mustering support for another bailout and subsequent round of austerity, Alexis Tsipras managed to rally Greek Parliament in favor of the latest deal ironed out with the Eurogroup. Just outside, protestors clashed with police, throwing Molotov cocktails and rioting after politicians backtracked on promises to end austerity and fight against more measures detrimental to the economic outlook. Alexis Tsipras has divided his party and more importantly the Greek people after agreeing to the measures. Now the ball is in the court of European parliaments as the bailout talks are set to restart, setting the stage for disbursement of capital that will enable Greek banks to reopen after nearly two weeks of closure. With a looming EUR 7 billion payment due Monday, a lack of bridge financing threatens a potential default. The Euro has not reacted favorably, falling below the key 1.1000 level as anxiety grows.