Yesterday saw Fed Chairman Yellen testify on the Semiannual Monetary Policy Report before the senate Banking Committee, where she struck a particularly bullish stance, stating that she remains committed to 3 interest rate hikes this year and that it would be careless to delay rate increase as the US economy may overheat, prompting a more aggrieve set of actions which may in the end put the US back into a recession.
Markets reacted with glee as we saw the USD continue north, with the USD index, a measure of the strength of the USD against a basket of currencies, break above the 101 level, pushing north as more traders jump on the bullish bandwagon. Surprisingly, equities bucked the trend of tighter monetary policy usually resulting in downward pressure of equities due to money becoming more expensive. Instead, we have seen indexes continue their bullish way, extending on record highs as we continue into uncharted territories. The bullishness in equities in mainly driven by a strong run by the banking sector which stands to make more money from the higher interest rates and is also fueled by political and fiscal reasons as Trump continues to push for an easing in banking regulations and his announcement on tax relief nears.
Yellen, did however, strike a cautious tone, that the rate hikes are subject to positive economic data out of the USA and today’s releases will give traders the first opportunity to gauge the health of the US economy, with the release of inflation and consumption data. We are expecting the CPI m/m and the Retail Sales m/m figures which are key indicators as to the health of the US economy with better than expected release implying that the economy is heating up and that consumers are prepared to spend on retail goods which ultimately will have buyers lining up to buy the USD and US equities. However, worse than expected releases will see the USD and USD Index’s sag as markets price in a slowing economy with a decline in consume spending, which would dampen the hawkishness instilled in markets by Fed`s Yellen.