Here we go … again. Janet Yellen just delivered a speech on the economy and monetary policy to the World Affairs Council. This will likely be the last policy speech by any Fed official before they enter the quiet period ahead of the June meeting, and it appears to be the only thing that market participants care about today.
Ever since the April FOMC meeting, the markets have struggled to find a direction. After hitting the 2016 high in April, the market proceeded to get skittish through May (a predictable seasonal move, by the way), only to recover and rebound back to the April highs last week. The equity market has essentially gone nowhere since April, and it now faces a real decision point over the next two weeks.
Will it be able to shrug off the noise and break out from the April highs and a few key technical levels? The indexes certainly look like they want to provided there's no major policy changes at the Fed meeting this month. If the U.K. stays in the E.U., that may provide the needed impetus.
However, conflicting messages from Fed officials, and a choppy, tortured macro data environment have been the main drivers to the sideways trade, and my suspicion is that those two things will not end any time soon. Indeed, the trade so far in June has all of the hallmarks of a market that is stuck. It would seem that this slow, low volume trade back to some key levels has been for no other reason than this: U.S. equities look at this point to be the “best house in a bad neighborhood” of global asset markets.
In her speech, Chair Yellen didn't offer the market the rate clarity that it so desperately wants. In truth, I see her comments engendering more confusion since her modus operandi is to give a dose of ambiguity coupled with ambivalence. This will induce more confusion when we stack up her comments against the other speakers, the Fed’s stated desire to normalize, and global growth concerns.
It is ironic to me that the Fed policy of transparency does not lead to a greater understanding of market direction for participants but only sets the stage for more outsized bets which stoke volatility. Having said that, it remains something that must be dealt with, regardless of our feelings toward the openness.
So, while Chair Yellen was cagey as always, she described Friday's dismal payrolls report as "disappointing." As such, she seems to have hinted that a rate hike would likely come in September at the earliest.
The current setup suggests that this is a market that would like to go higher if given the right cues. Small caps have started to lead the large caps, positive momentum has been built into the market (despite the low volume), the VIX is hovering near the lower end of its trading channel, and yields are still woefully low. These are all bullish signals for the market, and all it will take is for a catalyst—a long lasting, definable catalyst—to send it back to the all-time highs.