Yellen expected to have a steady hand, June is still the date for hike

Outlook:

Today the calendar includes Redbook chain store sales, the Case-Shiller home price index, the flash PMI services index, consumer confidence, the Richmond Fed, and Yellen’s congressional testimony. Three guesses what counts.

Yellen may push Greece out of the headlines. Yellen’s testifies first to the Senate, to be followed tomorrow by essentially the same speech to the House. The consensus thus far is that the Fed prefers to err on the side of caution and desperately wants to avoid a “policy mistake,” which would be two-fold: scaring the bond gang and triggering a taper tantrum, and actually being wrong that the economy deserves and can withstand higher rates. How awful if one itty-bitty rate hike drove the economy into a tailspin and the Fed had to retreat back to the zero bound. We suspect making real the prospect of higher rates would get a lot of people up off their duffs. A little more capital spending would fuel wages, productivity and maybe even inflation.

We are inclined to think Yellen will have a steady hand and June is still the Date, as signaled by no fewer than three regional Fed presidents and contained in the hint at the Jan press conference that “patient” can end after two more meetings.

Some analysts focus on one thing only—will Yellen signal that “patient” will be removed at the March meeting? Market News quotes Stephen Stanley of Amherst-Pierpont, who says “the market will judge Yellen's testimony by what she says about ‘patient.’ Stanley is ‘reasonably confident that 'patient' will come out of the statement in March, and Yellen will set the stage for that move.’ If ‘patient’ remains in the statement at the March meeting, Stanley says, the Street will looks for ‘liftoff’ at the September meeting.”

We enjoy Fed-watching as much as anyone but this seems silly. Of course she is not going to tip her hand, transparency be damned. The Fed next meets March 17-18 so we have another three weeks to chew this cud. How can anything be tiresome and intriguing at the same time?

A new focus on “international” events that may influence the Fed via Mr. Fischer’s special committee should fade into the background given the Greek situation and new German data. Fischer wanted the committee to make sure the US doesn’t act in a bubble, failing to see dangers from abroad. This is a big departure from Greenspan and Bernanke, who took their US-only mandate literally. But foreign developments come in two stripes—extraordinary events with pinball and sometimes unforeseen consequences (Grexit), and general conditions. If we assume Grexit has retreated farther away, that leaves general conditions, and growth in Germany, now that it is consumer-led, is a green shoot. We have been promised consumer-led growth for two decades and we have it at last. This is a big deal and will be the subject of many an economic piece in months to come. But for the moment, the chief effect is on the Fed’s perception of its role in the global landscape. If the Fed was worried about sending the wrong signal by raising rates only a few months after the ECB starts QE, it can relax.

Whether Yellen talks about removing patience today or otherwise signals that June is the date, the Fed is on a rising rate trajectory, however flat and torturously slow. It remains to be seen how the bond gang adapts, with a bang or with a whimper. The more responsive security, surprisingly enough, is gold. Gold twitches to the beat of commentary on the Fed more today than we can recall ever seeing before. Well, in the absence of inflation to drive gold, this is probably logical. So far today, spot gold is $1200.57, down only $1.26 from the close, but just wait. It could take a bath later today. Or March 17-18.

As for Greece, we can expect some backtracking and to-and-fro-ing, but it looks like Greek capitulation to the principles of the bailout—he who makes the loan gets to make the conditions. We say it’s critically important that Dijsselbloem lied about Greece meeting the deadline. The EC is set to lean over backwards now that Greece has stepped back in line, even without a tie. Comedian John Oliver dissed Varoufakis for showing up at important meetings in his biker outfit, saying “You dress for the country you want, not the country you’ve got.” Nevertheless, Dijsselbloem lied for him! The ECB and the IMF might not be so nice.

Now Tsipras has to face the parliament and voters and convince them it was the best deal he could get, even if it’s not the deal he promised. Drama will ensue. Grexit is not entirely off the table, but slipping toward the floor.

Maybe this is the reason the euro is stuck in a tight range. Nobody can foresee the next drama that will trigger a move, let alone a breakout move. We have a series of lower highs and await a lower low, but don’t hold your breath. Trading the euro will probably be sheer misery for the next few days.