That Was “Easily The Most Hawkish” Yellen We’ve Ever Seen

 

Well, on Tuesday we got a taste of what Albert Edwards warned us about last week.

We did indeed get hawkish Yellen – much to everyone’s surprise – which added fuel to the reflation fire that was rekindled last Thursday with Trump’s “phenomenal” tax plan rhetoric. Have a look at the reflation trinity:

reflation

I think it’s important that investors recognize something that happened this morning. Have a look at the market action right around the time Yellen’s prepared remarks hit the wires:

reflationyellen

See how stocks weren’t really feeling the love as much as the dollar and yields? Yeah, that’s a preview of what happens when stock/bond return correlations flip positive from a monetary policy shock.

Recall that you want a negative stock/bond return correlation or, alternatively, a positive rates/stock correlation. That is, you want stocks and bonds to move in opposite directions. That way, you can diversify.

diversify

What you don’t want, is for stocks to lag or worse, fall when bonds fall/yields rise. That’s when you get taper tantrums.

Clearly stocks caught up today. But remember that I flagged this, because you can bet I’ll be referring back to it at some later date.

In the meantime, here’s some good commentary from Bloomberg regarding Yellen’s testimony and the dollar.

Via Bloomberg:

Fed Chair Yellen’s comments that every central bank meeting is “live” for a possible rate hike and that waiting too long to remove accommodation would be “unwise” added fresh fuel to a dollar rally that’s been gaining traction for the past week.

  • Yellen’s remarks in Senate testimony were the trigger point for a market that may have been short dollars, a trader in London said, while Amherst Pierpont’s Stephen Stanley described them as “easily the most hawkish message” that she has delivered as Fed chair
  • The USD rose against most G-10 peers, with the Bloomberg dollar index gaining as much as 0.4%, reversing a shallow overnight drop; USD/JPY rose to 114.50, its highest since Jan. 30
  • The dollar was supported by the 10Y UST yield, which rose to as high as 2.5% after trading under 2.43% at the start of the day, as investors raised the odds of a March rate increase to about 34%
    • The increase in odds may have been slowed by skepticism about the path of rates, as traders recall that the Fed hiked only once in 2016 after starting the year with bolder projections, a New York-based trader said
  • Yellen said there’s too much uncertainty surrounding fiscal policy from the new administration for it to be figured into the Fed’s economic forecasts
    • A lack of details from the Trump team had been cited by traders as helping to derail the post-election dollar rally, sending the greenback to six straight weekly losses until last week saw the first advance of the year
  • Richmond Fed president Jeffrey Lacker, speaking in Delaware at the same time as Yellen delivered her testimony, said there’s a compelling case for a March interest rate increase
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