Tuesday, 11 April 2017

Fed's Yellen aims to let 'healthy' U.S. economy coast along

The Federal Reserve's plans to raise U.S. interest rates gradually are aimed at sustaining full employment and near-2-percent inflation without letting the economy overheat, Fed Chair Janet Yellen said on Monday.

"I think we have a healthy economy now," Yellen said at an event at the University of Michigan's Ford School of Public Policy in Ann Arbor.

Unemployment, at 4.5 percent, is now a little bit below the jobless rate that most Fed officials think signals full employment, and inflation is "reasonably close" to the Fed's 2-percent goal, she said. With the economy expected to continue to grow at a moderate pace, she said, the Fed is now shifting its focus.

"Whereas before we had our foot pressed down on the gas pedal trying to give the economy all the oomph we possibly could, now allowing the economy to kind of coast and remain on an even keel -- to give it some gas but not so much that we are pressing down hard on the accelerator -- that’s a better stance of monetary policy," she said. "We want to be ahead of the curve and not behind it."

In the U.S. Treasury bond market, yields were little changed after Yellen's remarks.

The Fed raised rates in March for only the third time since the Great Recession, and most Fed officials expect the central bank to raise rates at least two more times this year.

Yellen's comments largely echoed what she has said since then, and did not offer any new color on the timing of the rate hikes, or of the Fed's eventual reduction of its $4.5 trillion balance sheet.

"We think a gradual path of increases in short-term interest rates can get us to where we need to be, but we don’t want to wait too long to have that happen," she said.

Asian stocks fell in choppy trade on Tuesday as the political tinderbox in the Middle East and the Korean Peninsula added to uncertainty over the looming French vote, pushing edgy investors into safer assets such as the yen and Treasuries.

Oil continued its steady climb on supply concerns in the wake of U.S. missile strikes on a Syrian air base last week, and a shutdown at a Libyan oilfield.

MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS swung between gains and losses and was last down 0.4 percent.

"Most Asian markets could be seen with moderate changes this morning amid a mixed trend," said Jingyi Pan, market strategist at IG in Singapore. "Price movements here appear to be largely mirroring those in the U.S., with key corporate earnings due later in the week and could be the reason that investors are still holding onto equities."

The heightened geopolitical risks come at a time when the global economy has shown steady improvement, led by the United States and encouraging momentum in export-reliant Asia.

Tokyo's Nikkei .N225 slipped 0.5 percent, dragged lower by a stronger yen. The declines were led by Toshiba Corp. (6502.T), which slumped 4.3 percent, with the conglomerate expected to file its twice-delayed earnings results on Tuesday, possibly without a full sign-off by auditors.

Accountants question the numbers at the company's U.S. nuclear subsidiary Westinghouse Electric Co., where massive cost overruns have pushed the Japanese parent company to the brink.

Chinese stocks fell about 0.1 percent .CSI300 and Hong Kong shares .HSI surrendered earlier gains to slide 0.7 percent.

South Korean shares .KS11 and Taiwan TWII were also lower.

Australian stocks reversed earlier losses to climb 0.5 percent, after a measure of business conditions hit the highest level in a decade. They earlier hit their highest level since April 2015 for the second session in a row.

The Australian dollar fell 0.1 percent to $0.7494, reversing earlier gains.

Overnight, Wall Street ended a choppy session little changed, weighed down by nervousness about quarterly corporate earnings later this week.

The depressed sentiment pulled 10-year U.S. Treasury yields down to 2.3463 percent on Tuesday from Monday's 2.361 percent close.

British Prime Minister Theresa May spoke on Monday with U.S. President Donald Trump and agreed that "a window of opportunity" exists to persuade Russia to break ties with Syrian President Bashar al-Assad, May's office said.

Trump is open to authorizing additional strikes on Syria if the use of chemical weapons continues in the country, the White House said on Monday.

Investors are also nervous about the possibility of U.S. military action against North Korea after the strikes in Syria.

A U.S. Navy strike group headed toward the western Pacific Ocean near the Korean peninsula as a show of force, while China and South Korea agreed on Monday to tougher sanctions on North Korea if it carries out nuclear or long-range missile tests.

In France, polls for many weeks have been showing centrist Emmanuel Macron and far-right leader Marine Le Pen on track to top the first round of voting on April 23 and go through to a May 7 runoff.

While Le Pen's plans to ditch the euro and hold a referendum on European Union membership have spooked many investors, recent polls have pointed to a tighter race, with support for far-left candidate Jean-Luc Melenchon surging recently.

"After Britain’s Brexit referendum and the U.S. presidential election surprised markets in 2016, could this event do the same?," Mark Burgess, global head of equities at Columbia Threadneedle in London, wrote in a note.

"As a Le Pen presidency is perceived to increase the likelihood of France’s withdrawal from the EU, the uncertainty is likely to continue about what this could mean for the euro, along with a potential wider hit to global markets."

The euro  pulled back 0.1 percent to $1.0585.

The dollar fell 0.2 percent to 110.68 yen JPY=, extending losses from Monday.

The dollar index .DXY, which tracks the greenback against a basket of major trade-weighted peers, was flat at 101.05, failing to rebound from Monday's 0.16 percent loss.

Oil prices retained recent gains that have pushed them to five-week highs, on a shutdown at Libya's largest oilfield over the weekend and the U.S. strikes against Syria.

U.S. crude CLc1 was little changed at $53.09 a barrel, lingering near a five-week high touched earlier in the session.

Global benchmark Brent was also steady at $56.01, following six straight sessions of gains

The market jitters and a weaker dollar supported gold, which retained gains from its two prior sessions.

Spot gold  was fractionally higher at $1,254.89 an ounce.

Reference: Nichola Saminather and Ann Saphir

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