Janet Yellen’s slip of the tongue in her press conference after the March FOMC meeting has sent stocks markets around the world tumbling into the red, bond yields spiking, and hammered precious metals.
While confirming the official Fed press release that the 6.5% unemployment level has been abandoned as a criteria for raising benchmark interest rates, and that rates would stay near zero “for a considerable time” after the taper had reduced quantitative easing bond purchases to zero, Yellen goofed.
When asked what ” a considerable time” meant, she said “around six months.” A quick bit of math shows that this means rates could start rising in the second quarter of next year – far earlier than markets had been led to believe.
Stocks on Wall St. plummeted on her statement, while the dollar, which had actually weakened during the Ukraine crisis, spiked. The DXY has risen above 80 for the first time since March 5, and the euro has retreated from recent strength to under 1.38. The yen is weaker, and emerging market currencies are being hammered as foreign investors start bringing their money home again in anticipation of higher rates in the developed world.
The yuan is down sharply after the second large cut in the daily fix by the Peoples Bank of China. The Chinese central bank, which has kept a tight rein on its currency for decades, recently doubled the allowable trading band for the yuan to 2% on either side of the daily fix, and has been pushing the fix lower to flush out speculators who had bet on the “sure thing” that the yuan would appreciate. These actions by China are in preparation for making the yuan a fully-floating currency, which will allow it to be designated a reserve currency by the IMF.
Wall St. crossed back into positive territory around 10am Eastern time, on the back of upbeat jobless claims. First-time jobless claims reported that 5,000 more people got the axe last week than the week before, with 320,000 pink slips handed out. This was actually less than expected, because the previous week has seen a huge drop in claims. The four-week rolling average fell 3,500 claims.
Existing home sales dropped 0.4% in February, as rising home prices and mortgage rates meant fewer people with the capability to buy a home. Large funds and rental REITs are also pulling back on snapping up foreclosures and regular homes to turn into rentals.
In Europe, stocks were down due to Yellen’s loose lips, as Russian president Vladimir Putin told Russian companies to leave European stock exchanges and register on the Moscow stock exchange. This move would have the effect of boosting the Russian finance industry, as well as “hardening” the Russian economy against any European sanctions. In related news, a senior advisor of the RAND Corporation warned U.S. companies with operations in Russia to make plans to evacuate personnel on short notice, beef up defenses against cyberattack, and prepare for an increase in punitive “audits” by the Russian government. These physical tax audits have sometimes been accompanied by armed Russian commandos to intimidate companies, according to RAND.
In Asia, the Nikkei dropped to a six-week low, and the Hong Kong index of major mainland Chinese companies dropped into a bear market. The Hang Seng index has dropped to 9-month lows. Emerging markets are having their stocks and currencies hammered, as Yellen’s remarks spark another flight of foreign capital. Investors are pulling their money back into the developed world in anticipation of higher interest rates at home.
Gold, platinum and palladium have nearly recovered to the level of Wednesday’s New York close. Silver is also recovering, but is still down 1%. The higher dollar is providing the strongest headwind this morning.