Yellen Shakes Up Policy Outlook

Weekly Report - 16/07/2017

Two Days of Congressional Testimony See Federal Reserve Chair Strike More Dovish Tone


After much anticipation and speculation, US Federal Reserve Chairwoman Janet Yellen presented her prepared testimony and took questions from members of Congress, sending the US dollar into a tailspin and equities to new heights amid a more dovish outlook for policy.

Last Week

Remarks from Janet Yellen took center stage last week, with a more dovish outlook hurting the likelihood of any interest rate adjustment until December.  Plans to decrease the size of the Central Bank’s balance sheet were largely ignored, with the process to begin after the September meeting.  One item that may hurt the Fed’s agenda is inflation, with the headline figure slipping to 1.60% and the core figure on hold at 1.70% printing below the Central Bank’s target.  Shifting gears, the Bank of Canada raised rates for the first time since 2010, bringing the key interest rate to 0.75% from 0.50%.

Despite the positivity exuded by the Canadian dollar, global institutions continued to ring the warning bells on Canada’s outlook amid rising household indebtedness and housing risks.  Across the Atlantic, unemployment in the United Kingdom fell to the lowest point since 1975, reaching 4.50%.  However, wage growth once again failed to keep pace with inflation, eroding consumer purchasing power.  To cap off the week, Chinese trade displayed notable gains, with both imports and exports rising through the twelve months ended in June, pushing the surplus higher.  Policymakers were nonetheless confronted by weak consumer price inflation which remained on hold at a 1.50% annualized pace while the monthly rate slipped into contractionary territory.


The Week Ahead

Market participants are gearing up for monetary policy announcements as the Bank of Japan and European Central Bank prepare to unveil their latest decisions.  Neither institution is expected to adjust record low rates and ongoing asset purchases during upcoming declarations, instead opting to hold off on any changes.  One item that could change the outlook for the ECB is inflation figures.  After coming in at 1.40% in May, headline annualized inflation is expected to dip to 1.30% while core inflation remains on hold at 0.90%.  Any sustained decline in consumer price growth could complicate the Central Bank’s efforts to taper asset purchases.

The UK will also be disclosing its own inflation numbers, with core and headline annualized inflation forecast to steady at 2.60% and 2.90% respectively, challenging the Bank of England’s policy stance.  Moving East, China will be releasing its preliminary reading of second quarter GDP, with expansion projected to pick up to 1.70% on a quarterly basis while the annualized rate of gain slows to 6.80%.  In North America, US housing starts and building permits for the month of June will be unveiled, with each figure expected to rebound after the prior month’s contraction.  Finally, Canadian inflation figures will close out the week, with both the headline and core figures projected to grow at a slower rate.


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