The week ahead features the ECB meeting and the US February jobs report. The Reserve Bank of Australia meets, Europe reports industrial production, Japan reports January current account figures, and China reports its latest inflation and lending figures. We frame this week’s discussion of the drivers in terms of four sets of questions and offer some tentative answers.  

1.  What is the significance of the price action following Yellen’s comments last Friday afternoon? The US dollar reversed lower, snapping streaks against euro, yen, and sterling. US interest rates eased.  Did Yellen contradict the other Fed officials, including Governors, about the likelihood of a near-term hike?  

Yellen, in fact, confirmed the likelihood of a rate hike on March 15.  She conditioned her statement on the US economic data to be broadly in line with the Fed’s expectations. There seems to be a not very thinly veiled reference to the February jobs data on March 10.  With weekly jobless claims (and their four-week average) making new cyclical lows, the chances of a meaningful downside shock has been minimized.  In addition, the average hourly earning likely recovered from January’s disappointment.  

If anything, Yellen may have been a little more hawkish than generally recognized. It describing the current monetary stance, she said it was “moderately accommodative.” Previously she said it was “modestly accommodative.” This may sound innocuous, but the Fed speaks in such nuances. Although several Fed officials, including Yellen, deny the Fed has slipped behind the curve, there seems to be a sense that there is more accommodation that needs to be removed.  

The market has taken the data and official comments to indicate with a high degree of confidence that Fed will hike this month. However, it has not priced the likelihood of three hikes this year. While the odds of a March move, according to Bloomberg calculations, rose from 40% to 94% chance in the past week, the odds of a third hike by year end is increased from about a one-in-four chance to a one-in-three.  

There was a typically buy the rumor (that Yellen would confirm what nearly all of the other Fed officials have been saying) sell the fact (when she did) activity in a relatively thinly participated Friday afternoon in North America. The dollar had moved higher for several session in a row, and the market had priced in a March hike by nearly as much as it could. The dollar was more than two standard deviations (Bollinger Bands) against several currencies, showing the stretched nature of the price action.  

US interest rates have also approached important levels, and based on recent data, many economists were revising down estimates of Q1 growth. The Atlanta Fed’s GDP tracker has it at 1.8% now, down from 2.5% on February 27 (though the NY Fed still sees it tracking 3.1%). The US 10-year yield rose every session last week, the first time in nearly a year. The two-year yield had risen every session last week as well, and even reached a six-year high before slipping lower ahead of the weekend. The uncertainty of the significance of the last few hours of trading last week may make for cautious and choppy trading until short-term participants get their sea-legs back, but it is largely noise for medium and long-term investors.