Hawkish Yellen Leads Markets Higher

Once upon a time, the markets would display fear at the prospect of interest rates in the U.S. rising but events of the last week suggest that is no longer the case.

At last week’s FOMC meeting, policy makers opted to leave interest rates at record lows and delivered what was deemed to be a fairly dovish message – lowering growth and inflation expectations and warning of heightened emerging market risk. Of course the Fed also stuck to the message that interest rates will probably rise this year but markets have been calling its bluff on that for months and with a probability of around 65% that rates will be unchanged in December, they are continuing to do so.

What was interesting though is sentiment was dealt a blow by the Fed message despite it appearing to increase the possibility of lower rates for longer. Clearly, the Fed’s growth fears are now a greater concern to investors than the prospect of a small rate hike. A rate hike would actually be a vote of confidence from the Fed in the strength of the economy, which is how it should be perceived.

We’re seeing more evidence of this change in attitude today, following Fed Chair Janet Yellen’s speech after the market close on Thursday. While her message was broadly the same as last week, she did add that she is among those that expects a rate hike this year which given her typically dovish stance is an important point. Risk sentiment is much improved so far in Europe today on the back of these comments and we’re seeing a similar pattern in U.S. futures. Clearly the markets now support a rate hike, even if they are determined to call the Fed’s bluff in the meantime.

Yellen stressed again on Thursday that any decision remains data dependent and therefore investors will be closely monitoring any U.S. data release and trying to determine whether it makes a rate hike this year more or less likely. Today’s third revision to second quarter GDP could have an impact on expectations if we see a significant change, although it should be noted that any small revisions may be overlooked to an extent as this is quite old data at this stage.

UoM consumer sentiment may be of more interest given the importance of the consumer to the U.S. economy. The preliminary release shocked investors a couple of weeks ago, falling to 85.7, the lowest since September last year. The number is expected to be revised slightly higher to 87.2 today which is still well off the highs from earlier this year. Flash services and composite PMI readings will also be monitored closely today but are expected to show a slight cooling in September, falling to 55.6 from 56.1.

The S&P is expected to open 21 points higher, the Dow 218 points higher and the Nasdaq 43 points higher.

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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.