Ambivalence rules, maybe

Two hands

The Laser Interferometer Gravitational-wave Observatory in the United States can tell what is happening in galaxies billions of miles away. America's Federal Reserve cannot tell what is happening on our own planet. That, at least, seemed to be the gist of the Fed chairperson's testimony yesterday.

It is in the nature of central bankers to avoid, wherever possible, offering hostages to fortune. There was no great surprise, then, when Janet Yellen played the two-handed economist on Capitol Hill yesterday. On one hand, awkward financial conditions "could weigh on the outlook for economic activity and the labor market"; on the other hand "economic growth could also exceed our projections".

As for the interest rate outlook she tried to be similarly ambidextrous. However, she managed to convey the impression that if it were up to her (which in theory it isn't - the committee decides) the next rate increase could be some way off. 

Mixed reactions

The text of Ms Yellen's speech was released half an hour ahead of its delivery and it had an immediate impact. Investors decided that if the Fed was more uncertain then so should they be. The Japanese currency strengthened by another two yen for a gain of nearly 5% over the last week.

The euro, which had been weakening ahead of the speech, turned abruptly north when the text became known. The yen, which had not, gained momentum to reach a 15-month high against the US dollar and a 27-month high against sterling. As for risk attitudes in general, the reaction was less coherent. European share prices were marked higher following the speech, with France and German indices rising by roughly 1.5% and the FTSE100 rising by half that much. North American equities fared less well, falling by about -0.6%.

There was similar confusion among currencies. The Canadian dollar took a -0.7% loss, the biggest of the day among the major currencies, while the antipodeans made net gains after initial setbacks. The Aussie added a third of a cent and the Kiwi went up by a full cent against the pound. Sterling itself came out with half-cent gains against the US dollar, the euro and the Swiss franc. It was unchanged on average against the other dozen most actively-traded currencies.

Pause for thought

With few economic data on today's agenda investors will have time to reconsider their assessment of Fed policy. They will be helped in this task when Ms Yellen makes a second appearance at Congress, this time at the Senate. 

Market moves in the Far East this morning were inconclusive, with the risky commodity dollars and the safe-haven yen and franc all drifting higher. Shares in Australia were up by 1% while in Hong Kong they were down by -4% on the first day back after the new year break.

It will be interesting to see if financial markets can come up with a coherent attitude to the newly "clarified" Fed policy. If not, expect continued choppiness.