Stocks regained some momentum today even as Janet Yellen came across as somewhat hawkish. The S&P 500 rose 0.5% to 2,187 and the Dow Jones rose 0.2% to 18,903. Banks today rose 1.7% while utilities fell 0.1%. Economic data today showed that CPI inflation rose 0.4% on the month and 1.6% on the year which was in line with expectations. Housing starts came in very strong both for starts and permits, which will be a tailwind for 4Q GDP. Today was a heavy day for Fedspeak. Janet Yellen said that said that a rate hike would be appropriate “relatively soon.” Given that backdrop interest rates in the United States rose. The two year yield rose 2bp to 1.03%. The ten year rose 8bp to 2.30%. The spread between 2s and 10s bear steepened to 1.26%. Similarly the US dollar strengthened on the day. USD rose 0.6% against EUR to $1.0626. USD rose 1.0% against JPY to Y110.15. USD rose 0.2% against GBP to $1.2421. The dollar was also stronger against all emerging market currencies on the Fed’s likelihood of raising interest rates. Commodity prices slid. WTI fell 1.3% to $44.97. Brent fell 1.2% to $46.07. The VIX remains low at 13.35. The market is currently pricing in a 91% chance of higher interest rates at the December 13-14 meeting.
Janet Yellen spoke today and given the market responds it appears that investors are continuing to price in higher rates as soon as next month. She used the term “relatively soon” and indicated that rising inflationary pressures and a tightening labor market were the primary drivers of that expectation. Additionally the Fed’s assessment on whether or not to raise interest rates was not altered by the election outcome. There had been some uncertainty surrounding the outcome before, however given the market response it appears to be no need for concern for the time being. She said the economy was making “very good progress,” and that recent data has affirmed the FOMC’s expectations. She stressed the importance of not falling behind the curve, which would suggest she is weighing the risks of raising rates too late. She reiterated the importance of raising rates gradually, but said that was subject to change depending in the scale of upcoming fiscal stimulus. She said that lawmakers should be conscientious of long term fiscal issues such as rising debt-to-GDP. Yellen said she plans on serving out her term that ends in February of 2018.
The Bank of Japan said it would buy an unlimited amount of Japanese government bonds at a set interest rate. The BoJ had been targeting a certain rate on its debt, however given the selloff in global bonds this past week that yield had risen above the target. To ensure that the BoJ’s policy goals are met, it will now buy bonds at the target rate in an unlimited quantity if needed. This unprecedented level of stimulus also contributed to the JPY’s 1% decline versus USD today, in addition to USD strength. Accordingly yields in Japan fell after that was announced. Kuroda said he would combat market forces to keep Japans interest rates low. Although no banks took the offer at auction, it sends a signal that the BoJ will intervene as needed to prevent the short end of the yield curve from rising.
The government is Taiwan is providing a relief package for container shipping companies. This comes after industry pressures forced Korea’s Hanjin Shipping company into bankruptcy earlier this year. The package will total $1.9bn and will include lines of credit with low interest rates to Evergreen Marine and Yang Ming Marine Transport which are among the two largest container operators. Taiwan recognizes the importance of global trade to its economy, which is why it is willing to step in and provide liquidity to the sector. When Hanjin went bankrupt $14bn in goods were left at sea for months, which put a wrinkle in supply chains for a variety of industries. From a finance perspective this likely created a lot of distressed receivables. 98% of the world’s manufactures goods are transported overseas through shipping containers however a slowdown in global trade and a huge supply of shipping capacity have pushed freight prices to levels that are barely profitable for companies. There has been a great deal of consolidation in the industry as global trade growth this year is likely to be the slowest since the recession. Freight rates for Asia to Europe are just $700 per container per month right now with a break even point of $1,400. As such freight shippers are expected to post a loss of $10bn this year across the industry.