Today at 3:00 PM London time, the Federal Reserve Chairwoman, Ms. Janet Yellen, will give testimony to the House Financial Services Committee on the semi-annual Monetary Policy Report.
This hearing takes place during uncertain times for both the financial markets and world economy. On Monday, the news that CreditSights Inc. had questioned German banking colossus Deutsche Bank on its ability to pay up on its bond obligations in 2017 was released. This report helped to contribute to a meltdown in global indices values.
Although the senior management of Deutsche Bank (DE:DBKGn) was quick to issue statements that denied this analyst report, the damage had already been done. The news that highlighted the potential woes of a bank that is so key to Germany’s and Europe's economic future has now put the spotlight back on Europe’s financial system.
The idea that we are about to revisit the dark days of 2008/2009 is a worrying spectre, especially as confidence in Europe’s periphery is still fragile with Greece and Portugal once again returning back to the media and market spotlight.
Italy continues to struggle as it tries to break from the stranglehold of a deep recession and the move back into patchy growth. We do have news shortly from Istat which will publish the latest Italian Industrial Production number. However, following yesterday’s horrid publication by Destatis on German Industrial Production, the head of the European Central Bank will be looking over his shoulder and hoping for some positive news from his homeland.
Back to this afternoon’s event in Washington, Janet Yellen has the decision to take on the tone of the testimony. The FOMC has two key mandates - to ensure price stability and a healthy employment outlook. Although the to-and-throw of short-term movements in the financial markets should not be of a concern, the Federal Reserve Chairwoman could address this subject during today’s key speech.
Of course, a shift to a dovish tone would undoubtedly go some way in giving comfort to investors who have seen the value of their equity holdings shrink since the beginning of 2016. Especially as the falls in equity value are highlighting the strain within the global banking system.
During today’s testimony, the market will be listening to the weight that is given to the two key FOMC mandates. If Mrs Yellen sticks to the hawkish line that the labour market is strong and that economic weakness is a short-term phenomenon, then one could expect to see a continued move lower in equity values and the US dollar gathering some respite.
However, according to market pricing, the probability of the Federal Reserve dot plot that has forecast four rate increases during 2016 will just not happen. It would seem that the Federal Reserve will be lucky if it can force one rate hike in December. For sure March interest rate increase looks like it is off the table.
To end, the Italian Industrial Production number has just been reported as -0.7%. The forecast was for an improvement to 0.3%.
Why is there is never any good news when you want it?