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Yellen Sets the Stage for Higher Rates

Market Digest – Week Ending 3/21

The capital markets proved quite willing to transition Crimea to Russia. Stocks advanced on growing perception that Russia will not seek further territory and the West will not apply biting sanctions. Economic data such as higher than expected manufacturing activity also bolstered confidence. Fed Chairwoman Janet Yellen indicated the Fed may start raising rates “something on the order of six months” after winding down its bond buying program, even if unemployment remains above 6.5%. There was no indication of change in the Fed’s short term policies. Bonds fell.

Weekly Returns:

S&P 500: 1,866 (+1.4%)
FTSE All-World ex-US: (+0.1%)
US 10 Year Treasury Yield: 2.74% (+0.09%)
Gold: $1,333 (-3.6%)
USD/EUR: $1.379 (-0.9%)

Major Events:   

  • Monday – Russian President Putin signed a decree officially acknowledging Crimea as an independent state, just one day after the region voted to succeed.
  • Monday – The Chinese Central bank doubled the Yuan’s daily trading band, leading it to fall relative to the dollar.
  • Monday – General Motors recalled another 1.7 million vehicles and said it plans to take a $300 million charge to cover problems with ignition switches.
  • Wednesday – Fed Chairwoman Yellen said interest rate increases could begin as early as a year from now, relative to earlier consensus views of late 2015.
  • Thursday – The Philadelphia Fed manufacturing index topped expectations, providing confidence momentum will return after weather related slowdowns during winter.
  • Thursday – AirBnb was rumored to be raising capital in a funding round that would give the home and room sharing business a valuation of $10 billion.
  • Friday – Biotech stocks fell after a letter from the House Energy and Commerce Committee requested a briefing with Gilead regarding the pricing of its Hepatitis C drug.

Our Take:

Capital markets had a knee-jerk reaction to new Fed Chairwoman Janet Yellen’s suggestion Wednesday that the Fed may start to raise interest rates sooner than previously mentioned. Ultimately, whether short rates start to rise next spring, next fall or in 2016 should have little bearing on stock prices. In fact, if rates rise sooner it will most likely be driven by stronger economic growth.

It is easy to forget that the current state of monetary policy is near zero short term interest rates and the purchase of $55 billion of bonds this month. Yes, that is $30 billion less than last year, but it is $55 billion more than normal. The really interesting thing will be if all this quantitative easing ever leads to inflation. Yellen got called in to the game with the bases loaded.  It is only natural for her to want to take a few steps to clarify where blame should lie if Bernanke’s aggressive policies prove problematic in the future.

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