Yellen keeps options open, lays the ground for removing ‘patience'

Market movers today

• US new home sales is the only number of interest today, a very quiet day on the data front. The figure rose very strongly in December and is expected to fall back a bit in January (we expect -2.2% m/m).

• Fed chairman Yellen testifies again - this time to the financial service committee in the House. However, she is not likely to provide much new information following yesterday’s testimony in the Senate.

• Riksbank minutes is the key event in the Scandi markets but Norwegian consumer confidence will also be in focus. For more on Scandi markets see page 2.

Selected market news

Yellen keeps options open, lays the ground for removing ‘patience’. Speaking before a US Senate committee yesterday, Janet Yellen provided little new information on when to expect the first rate hike. However, she did pave the way for a key phrase promising that the Fed will be ‘patient’ before raising interest rates to be removed from the statement as soon as the March meeting, by saying that this does not necessarily signify an imminent rate hike. We expect the word to be removed in March and look for a first hike in June.

Euro zone approves Greek aid extensions but obstacles remain. After approving a list of reform ideas from Athens, the Eurogroup yesterday ratified the tentative agreement reached last Friday, which grants Greece an extension of its financial rescue programme by four months. However, several obstacles remain, including the need for several national parliaments to approve the extension before the bailout expires on Saturday. Furthermore, the remaining EUR7.2bn of bailout funds under the current programme will not be disbursed until the list of reform measures is finally reviewed by the Troika and the Eurogroup by end-April. Of the remaining money, EUR3.6bn is coming from the IMF, which released a statement yesterday voicing concerns, just as the ECB did. Hence, implementation risks remain high. Moreover, Greek finances will remain under pressure in the short term, e.g. in March when large IMF repayments fall due.

Risky assets post further gains. Markets took a constructive view on the situation in Greece, with equities and euro peripheral government bonds rallying on the extension of the bailout package. US bond markets seemed to interpret Yellen’s testimony as dovish, possibly seeing the emphasis on flexibility as supportive in view of the weaker data recently.