Fed speakers watched for greater clarity following Yellen's comments

• UK CPI inflation to drop further below 2%
• Fed speakers watched for greater clarity following Yellen’s comments
• Euro wide survey data to point to ongoing signs of recovery

Yellen sparks bond market sell-off... While the rising political temperature in the Ukraine continues to pose significant event risk, global financial market sentiment has been diverted by what many have interpreted to be muddled comments from Janet Yellen. Bond yields have moved higher and yield curves have generally steepened on suggestions by the new Fed Chair that US interest rates may rise earlier than previously thought.


Chancellor springs a surprise... UK yields have also risen, partly in response to US events, as well as surprise Budget changes. Although the overall stance of the Budget was fiscally neutral, the Chancellor’s announcement that those individuals with defined contribution schemes will no longer be required to buy annuities has raised concerns about future demand for gilts, especially at the long end of the curve. Over the week, 30-yr gilt yields have risen by around 10bp to 3.55%.


UK inflation headed lower... This negative sentiment could be reversed in the coming week by softer inflation and retail sales data. Headline CPI is forecast to have dropped to over a 4-year low of 1.7%, while retail sales are projected to have fallen by 0.2% albeit, we suspect, weather impacted. Final Q4 GDP is also due, as well as the latest LB Business Confidence Barometer (see back page). From a policy perspective, close attention is also likely to be paid to the statement from the Financial Policy Committee (FPC). Following Governor Carney’s comments in the Mais Lecture, any references/recommendations made by the FPC regarding the housing market are likely to be scrutinised particularly closely.


US personal spending watched for Q1 GDP impact... Elsewhere, the upcoming US economic calendar is fairly heavy, but bereft of headline releases. Personal spending, home sales, consumer confidence, durable goods and final Q4 GDP data are the highlights. Of these, personal spending is perhaps the most important as it feeds directly into Q1 GDP. That said, we doubt any of these releases will prompt a sharp market reaction, especially given the ongoing debate over the impact of the severe winter. Instead, the main focus is likely to remain on the Fed.


Yellen taken out of context?... This week’s FOMC statement and post meeting press conference has left markets pondering whether the Fed is now signalling a less dovish policy outlook. At the press conference, Yellen appeared to inadvertently answer that US interest rates could rise as early as next spring. While we suspect Yellen did not intend to be quite so direct, with the majority of the FOMC anticipating that rates will be 1% by end 2015, recent market nervousness is understandable. With a number of Fed members due to speak over the coming week, markets will be watching for any clarification/confirmation of the Fed’s intentions.


Survey data to point to ongoing recovery... In the euro area, preliminary manufacturing and service sector PMIs for March are released on Monday. These are followed by the German IFO (Tues) and the European Commission’s region wide consumer and business confidence surveys (Fri). Overall, we expect these to remain consistent with ongoing gradual recovery across the region, but strength in Germany. Although the German ZEW index posted a sharp drop in March, even after the latest drop the index remains at a high level, especially when compared with other surveys. Euro area money supply figures are also due (Thurs). After the AQR-inspired rush by banks to raise capital at the end of 2013, money supply growth appears to have bottomed out. We expect annual M3 to have nudged up again in February.