Yellen Must Provide More Clarity on Rate Hike

U.S. indices are expected to open in the red again on Thursday, reflecting the ongoing downbeat mood in the markets that has been apparent since the FOMC meeting last week.

Janet Yellen, Federal Reserve Chair, is due to speak later on today on inflation dynamics and monetary policy at the University of Massachusetts and her comments will be heavily scrutinized by investors. There is still a lot of uncertainty in the markets about when the Fed will initiate that first hike despite its insistence that it will be this year. The problem is, it also revised down its growth and inflation forecasts while warning of heightened risks from emerging markets so it’s not really straightforward.

At a time when inflation is already very low and deflationary pressures remain, the argument against a hike is that a Fed that is genuinely data dependent should not be raising rates as it is ignoring half of its mandate. Especially when we’ve seen so much emerging market turmoil just in anticipation of a hike, which could apply further deflationary pressures in the future. Clearly the decision is not so black and white and this is being reflected in the markets with uncertainty really weighing on investor sentiment.

Yellen has an opportunity to provide more clarity when she speaks today, something she clearly failed to do last week. If she continues to talk up the threat of emerging markets and the existence of deflationary pressures, we could see markets continue to push back rate hike expectations into next year. Already the markets are pricing in only around a 35% chance that rates will rise this year, if she still intends to hike and not cause too much market turmoil, she needs to start sending a clear message.

With the Fed still clearly undecided on the timing of the first hike, the data remains very important. There is a number of pieces of data being released today and there’ll be a key focus on durable goods orders for August. This is a great indicator as it encompasses confidence in both the current climate and the outlook. Businesses only invest in these larger items when they are optimistic about the outlook. The core reading has seen four positive months which is unusual as this can be quite volatile and we’re expecting to see another small increase this month.

Also being released today is weekly jobless claims which are expected to rise slightly to 268,000 and new home sales, which are expected to rise to 515,000. These will both also be monitored closely but durable goods order tend to have a greater impact.

The S&P is expected to open 13 points lower, the Dow 101 points lower and the Nasdaq 35 points lower.

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Craig Erlam
Based in London, England, Craig Erlam joined OANDA in 2015 as a Market Analyst. With more than five years' experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while conducting macroeconomic commentary. He has been published by The Financial Times, Reuters, the BBC and The Telegraph, and he also appears regularly as a guest commentator on Bloomberg TV, CNBC, FOX Business and BNN. Craig holds a full membership to the Society of Technical Analysts and he is recognized as a Certified Financial Technician by the International Federation of Technical Analysts.