We were all looking forward to what Chair Yellen would have to say in her first testimony to the House Financial Services Committee and, just as much, how she was going to say it. Firstly she adopted that sort of Greenspan drone, albeit an octave and a half higher, and secondly she also dug ever so deeply into the Greenspan box of syntax and vocabulary.
In the 1,500 word speech she told us what we already knew and other than delivering a beautifully crafted piece of “Fedspeak”, Yellen added nothing, took nothing away and in doing so reassured markets that there will be no shift in either direction or speed of monetary policy adjustments in the foreseeable future. By adjustments I mean the speed of quantitative tightening if that is what the opposite of quantitative easing ought to be called.
All the while, the Dow rallied 1.22% to close at 15,994.77 points within spitting distance of the 16,000 point mark which it dropped below on January 24 during the most violent days of the emerging market currency dump. That means that it has bounced 4% in the just five days of trading. The word on the Street is that there is a wall of cash dodging around on the side-lines and I suspect there might be a spot more buying about to set in.
While equity markets were swooning, bonds quite naturally caught a safe-haven bid which, at the time, I recommended to fade. Rather cheekily, they rallied in my face but as stocks recover bonds are gradually selling off again. Ten-year Treasuries open this morning at 2.73%, within just 2bp of the 2¾% level which I think should have represented the floor of an acceptable trading range all along. In the fullness of time, selling anything below 2¾% can’t really be wrong.
Anyhow, the main Yellen message was that the Fed intends to remain boringly reliable, that it takes a long time and a lot of thinking before it embarks on a policy course or a change thereof and that it will not be swayed or diverted by the slings and arrows of the markets. I heard of interpretations of her testimony which referred to her dovish stance. Sorry guys and gals, save your words for dealing with the unexpected. Of that there was none.
Chinese stats
So, with that out of the way, we can focus on the Chinese January trade balance which was reported this morning and which, at a surplus of US$31.86bn, firmly knocked the cover off the ball. Consensus forecast had been for a decline from December’s US$25.64bn to US$23.45bn. The reported increase – and a sharp one at that – had analysts scratching their heads. Is this proof that the Chinese economy isn’t in anything like the parlous state which we all supposed or should the figure be aligned with lies and darned lies? Markets have a lovely habit of believing what they want to believe.
Trade numbers can be manipulated at will in China as the option to round-trip goods through Hong Kong in order to circumvent capital controls is always open. Within the thinking community – that seems to encompass no more than a small minority of market participants – there are doubts about the integrity of Chinese statistics but ignoring that and joining the Flat Earth Society works just as well. So long as everyone accepts and works with the same incorrect data, nothing can go wrong… can it? Nothing changes when it comes to reminding ourselves that we are not here to get the economy right but the markets. If they want to dance a waltz to techno, let them do it and if you can’t beat ’em, join ’em.
Sterling desires
Meanwhile, here in the UK, the forecasts are for further storms and disruption … but that is just the beginning of the debate on whether an independent Scotland will be allowed to retain the pound. The Chancellor of the Exchequer and the Governor of the Bank of England have said no but the King of Salmondshire has said yes. Errm? I’m not sure that he is the one who has the choice.
When faced with the hard realities of what it really means, the SNP reverts to banging on about the niceties of independence. Unionist hope that the voting population will eventually wake up and take fright to the prospect of buying a cat in a bag. As polls are going at the moment, this does not appear to be the case. We can but wait and see.
As a Canadian, Carney the Magician will have been through all the thought processes which go hand in hand with secessionist movements and currency unions and I’m pretty sure he knows what he’s talking about in this area, even if I do think his forward guidance thing was nonsense.
Incidentally, what I have yet to see is a sensible study of what sterling would be worth if Scotland voted yes and really did stumble off into the sunset. Has anyone got anything usable they could refer me to please?