Yellen Strikes More Hawkish Chord

Daily Analysis - 15/02/2017

US Central Banker Upbeat on Outlook for Gradually Raising Rates

In prepared testimony before taking questions from Senators, Federal Reserve Chair Janet Yellen reaffirmed the Central Bank’s commitment to raise rates three times during the calendar year while focusing on the upside factors for policy instead of downside risks.

March Rate Hike on the Table

As evidenced by Fed Chair Yellen’s more optimistic tone on Tuesday, the US Central Bank is likely to discuss raising rates during the upcoming March meeting of the Federal Open Market Committee. In her most hawkish comments yet, she remarked that “waiting too long to remove accommodation would be unwise,” suggesting that more monetary tightening will be forthcoming. However, in-line with other Fed officials, she maintained the position that any adjustments to policy would be largely data dependent.

Should inflation figures due later in the session come in hotter than expected, it could raise speculation further that March action is in play. During her testimony she also briefly broached the matter of fiscal policy, stating that it was the predominant source of uncertainty for the outlook. The dollar pushed higher on Yellen’s remarks, with USDCHF reaching the highest point since January.

Euro Area GDP Growth Surprisingly Decelerates

After the upbeat preliminary reading of fourth quarter GDP, the first revision of Euro Area gross domestic product figures for the period came in slightly lower than consensus estimates. Quarterly growth printed at 0.40% versus the 0.50% reported prior as annualized growth slipped to 1.70%. The main countries within the monetary union that continued to drag on results were the Greek and Finnish economies while growth activity tapered significantly in Italy, the Netherlands, Portugal, and Cyprus.

Even after the more upbeat forecasts released by the European Commission, risks to the outlook remain significant, especially as growing political unease means an absence of fiscal stimulus for many of the region’s core economies. Furthermore, industrial production growth decelerated during December to 2.00% from 3.20% reported in November, complicating the future of economic activity. The Euro remains slightly elevated versus the Pound after notching gains on Tuesday.

UK Inflation Continues to Climb

Despite missing market expectations by a small margin, consumer price inflation in the United Kingdom sustained its most recent trend higher during January, with the headline price index rising by 1.80% on an annualized basis through the end of the month compared to 1.60% in December. Core inflation remained on hold at 1.60%, with the predominant upside driver of the headline figure rising fuel costs. This brought the measure to the highest point since June of 2014 in another sign that the Bank of England may actually need to tighten policy in the coming months depending if the measure rises further.

However, the monthly figure should give pause for caution, especially after inflation fell by -0.50% during January on the back of decreasing clothing and household goods costs. In the meantime, the Pound continues to extend recent gains against the Yen, trending back towards 143.000.

Turkish Unemployment Highest Since 2010

In a form of additional confirmation, the latest Turkish jobless figures showed that the economy continues to crumble as the ongoing enduring political purge and heightened terrorism impact business activity. Turkish unemployment now numbers 12.10% as of the end of November, marking the worst reading since March of 2010 as hiring falters.

The more concerning aspect of the latest figures was the jump in youth unemployment to 22.60%. Even with the rosy European Commission forecasts of 2.80% growth for the economy during 2017, sustained economic headwinds, stagflation, and political unrest are likely to weigh on any progress. Following the third quarter GDP contraction which dragged annualized growth into negative territory, the outlook remains fraught with risks, especially after the latest sovereign credit rating downgrade. Nevertheless, the Lira has continued to strengthen versus the US dollar, lengthening its latest winning streak.