Markets have had more than 24 hours to digest Federal Reserve Chief Janet Yellen’s comments before the Economic Club of New York on Tuesday, and the direction on Wall Street has been somewhat shaky. An initial triple-digit rally lost a bit of momentum midday Wednesday as U.S. equities took a bit of a step back to ponder the central bank’s next move in the context of global monetary policy and U.S. economic data.
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Scott Martin, chief market strategist at United Advisors, said the rally on Tuesday in the wake of Yellen’s remarks “felt cheap,” and signals disappointment ahead as the Federal Reserve walks back some of its bullishness from the December meeting in which it raised short-term interest rates by a quarter of a percentage point.
“They’re kind of back in this Jack Burns from 'Meet the Parents' ‘circle of trust.’ And the markets are like hey the [People’s Bank of China], the [European Central Bank], [Bank of Japan], the Fed has it all under control everybody. So stocks can rally, bonds can rally, everything’s going to be okay,” Martin said on the FOX Business Network’s Cavuto Coast to Coast.
To that point, analysts at Barclays (NYSE:BCS), in a note, agreed Yellen’s comments about maintaining a cautious outlook on monetary policy and monitoring global market and economic conditions before moving forward on its rate-hike plans for 2016, went against remarks from other members of the Federal Open Market Committee.
Indeed, in recent weeks, several FOMC members, including St. Louis Fed President James Bullard and San Francisco Fed President John Williams, have signaled that the U.S. economy is on firmer footing, bouncing back from a weak start to the year, and ready for more rate hikes sooner rather than later.
“Her comments…are more clear in respect to downside risk factors and their possible effect on the outlook for activity and inflation. Hence, we see the chair’s comments as an effort to exert control over the message and, in doing so, tilt expectations for policy rate hikes in a decidedly dovish direction,” the note by Michael Gapen and Rob Martin read.
Since Yellen’s remarks, the markets have pushed back expectations for rate hikes this year. According to fed funds futures, the odds of a rate hike in April have been reduced to just 4%, while June sits at 26%, and a hike by the end of the year edges up to 63%.
While inflation has moved closer to the Fed’s 2% target, the central bank will also continue to closely eye any further firming in the U.S. labor market. Next up on the U.S. economic data calendar is Friday’s non-farm payrolls, better known as the March jobs report. Economists on the Street expect to see a gain of 205,000 jobs for the month, a slightly slower addition from the 242,000 jobs added in February. Meanwhile, average hourly earnings are forecast to pick up 0.2%.
In Martin’s view, a so-called mediocre jobs report would help markets continue to rally in light of Yellen’s updated policy views.
“It’s almost like the market wants to say hey here’s a bad jobs report, Fed, come in and help us…and that’s scary because eventually that will come home to roost. We got a preview of that late in August, early September, we got another preview of it in January and early February of this year,” he said.
Friday also brings a slew of closely-watched economic indicators including a reading of U.S manufacturing from the Institute for Supply Management, and an updated look at consumer sentiment. March auto sales are also on tap.