A dove in hawks clothing

Equity markets had a sharp boost on Wednesday as Janet Yellen’s testimony to Congress was more dovish than investors had expected. Janet Yellen appeared more open-minded when it came to inflationary prospects for the US economy. We have pointed out recently that the usual drivers of inflationary pressures, higher wages and higher commodity prices just are not coming through. Ireland's economy slipped back into deflation in the past month. The base effect of stronger inflation in the first half of the year will lead to downward pressure in the second half. This has been borne out in the recent US data. Inflation in the world's largest economy has been slipping back in recent months and remains below the Fed’s target.

Raising interest rates historically have been too slow economic growth to prevent inflationary pressures building. The Federal Reserve or any other body is in any way minded to slow economic growth at this point in time.

Governments have another issue when it comes to interest rates. According to the IMF, the world has something in the region of $160 trillion of debt, or more than 200pct of global GDP. Any slight changes in global interest rates have an impact on the interest payments. US Treasury yields fell on Wednesday night in response to her comments. It is worth bearing in mind that despite the more hawkish comments from central bankers recently, the current real yield on developed 5-year debt remains in negative territory.

Capital markets are supposed to be bracing themselves for the massive support from central being in the rear-view mirror, as Mohamed El-Erian describes it in the Financial Times on Thursday. That and earnings are considered the biggest threat to equity markets. Traditionally that is the case, however, the one thing we can rely on when studying capital marketsis  to expect the unexpected. What ever will ultimately remove this current low volatility world, it probably won’t be either of the above.

The news flow for Donald Trump and the possible connections with Russia during the election campaign go from bad to worse, yet equity and bond markets seem to completely ignore the headlines.

Donald Trump came to power promising a lot, so far delivering very little. The investment community never likes that at a company level, yet has not minded so far at a macro level. Perhaps the possibility Mr Trump may get impeached is a good thing. He has hardly made many friends abroad and done nothing to improve global trade relations. He has delivered nothing in the way of fiscal reforms, and economic growth is below his target of 3%. Perhaps if he were to go the markets might take the view that the barriers that Mr Trump is putting up could be removed and the Republican party can get on and deliver some of his election promises.

Posted on July 13, 2017 .