The continuing policies from central banks have been very accommodating for European and U.S. stocks, allowing prices for global equity to remain at the highest levels on record. The feelings of optimism are only set to increase as the bulls in the market look towards an increase in the manufacturing sector of China.
The chairwoman of the Federal Reserve gave recent testimony to the Senate Banking Committee suggesting that the Central Bank of the U.S. was not feeling pressure to raise interest rates on borrowers. This information provides the Fed with flexibility and denies any market biases. Still, the U.S.’s bond market reacted differently, allowing for a considerable drop in yields.
The 10-year Treasury yield actually extended its decline by an additional three points, settling at 1.96 per cent. The dollar index retreated as well, moving 0.3 percent to 94.2 and altering the measure of the currency’s value against select peers. Additionally, gold moved up to $5, making it worth at least $1,204 an ounce. With all of these changes, U.S. economists focused on directing attention towards inflation coming out of labor markets. This factor will play a major role in determining the future for interest rates.
Fed officials are comfortable with forecasting continued job growth. However, their confidence in the outlook for inflation is yet to be seen. The Open Market committee again predicts 2-percent inflation over the next two years. However, these rates will gradually deteriorate in the model used. Given these facts, it does not seem that interest rates will rise any time before September.
The response of the European Central Bank has been to begin quantitative easing in order to suppress bond yields. This action comes in the wake of concerns over the declining outlook of Greece. Ireland also joined in the isolated setbacks as their 10-year, sovereign yield dropped below one per cent for the first time. Portugal sold bonds a for a record low while Germany auctioned five-year debt for a minus 8bp yield. JP Morgan’s Asset Management representative, David Tan, weighed in on the situation by stating that the majority of banks preferred owning a five-year government bond at minus 8bp.
The People’s Bank of China contributes to global success by decreasing the price of Chinese exports as they continue to ease credit. If this trend continues, then the pressures for inflation coming out of China will decrease as well. While this is good news for the U.S. despite a recent rise in crude stocks, the oil minister of Saudi Arabia sights increased demand as the market continues to settle.