Why Yellen’s Speech Will Likely "Underwhelm" The Market: Deutsche Bank’s Take
By Tyler Durden
The most important event of the day, if not week now that the monthly payrolls report has become meaningless in steering the Fed’s no-longer-US-but-Chinese-data-dependent-path, will be Yellen’s speech at the NY Economic Club shortly after noon local time.
As DB’s Alan Ruskin previews, this is an “an event that many hope will provide clarity on whether the market’s original interpretation of the FOMC dots/balance of risks/forecasts and Q&A in all its entirety, was as dovish as originally assumed; or, whether the subsequent more hawkish comments from various Fed officials was more in keeping with what the FOMC was trying to convey.”
Ruskin adds that, in the aftermath of yesterday’s sharp downward revision to the Atlanta Fed Q1 GDP Nowcast from 1.4% to just 0.6%, “just to complicate the message the most recent data (corporate profits, core PCE deflator and revisions to PCE) work in favor of a more dovish conclusion. While Yellen has already said the April FOMC is ‘live’, and she will probably reaffirm this, we do not expect her to emphasize or belabor the point.”
Some more problems Yellen will face when communicating with the market:
One difficulty she faces in saying anything fresh is that she will be ‘flying blind’ when it comes to the major March payrolls and ISM numbers ahead, which is a difficult position for a data dependent Fed. Even if this week’s data is stronger than expected, the Fed is going to have a very tough time lifting expectations of an April hike to an acceptable level to hike without shocking the market, given current probabilities of an April hike at 8%! The communication problem the Fed faced in their March FOMC messaging was that apropos the dots, most members were comfortable with the Fed signaling two rate hikes this year, but there are few signs that they wished to reduce the probability of a Q2 hike, most obviously in June.
It would not be surprising if Yellen’s view is that before hiking rates, the burden of proof is on i) employment in the next few months showing it is resilient to the recent shock in financial conditions, and, ii) that payrolls remains solid in the face of weakening profitability and poor productivity – see Figure 1 below).
This fits with watching and waiting out the March, April and May payrolls before acting next; unless the coming March data is extremely strong, and they want to seize any opportunity afforded by quieter international markets to tighten in April – which still seems unlikely.
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However, while Yellen’s speech will at best confirm how confused the Fed is, the real question is how the market will react during and following the Chairwoman’s speech. This is what Deutsche Bank thinks will happen:
Probably remaining very reluctant to price in an April hike, and therefore still working with a …read more
Source: Why Yellen’s Speech Will Likely "Underwhelm" The Market: Deutsche Bank’s Take
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