- Friday's major market moving voices were Janet Yellen and Vladimir Putin. We wondered as the day progressed, which voice would ring truer and drive stocks.
- Fed Chair Yellen spoke at the Kansas City Fed's Economic Symposium to an acutely attuned audience globally, and she offered a decidedly dovish tone in my opinion.
- Vladimir Putin spoke with words to Angela Merkel and with action in Eastern Ukraine, and left stocks in the red by the close, so you have your answer.
If Janet Yellen and Vladimir Putin faced off in battle, I think we all know who would win. But as far as their impact on markets go, well then predicting the victor gets a little more difficult. Friday, the two powerhouses of market moving influence squared off, and into the close it looks like the winner is Putin. So, take risk off, as Yellen has already taken her best shot, but Putin is loading up with a roundhouse to finish us all off perhaps as soon as this weekend. It's just not worth carrying risk here or being without a hedge to hide in.
Janet Yellen's speech at 10:00 AM ET Friday at the Kansas City Fed's Economic Symposium in Jackson Hole could have been dangerous if she seemed enamored by the latest economic data, which has shown extremely strong this week. Good economic data, you see, stokes trader concern that a Fed rate action could come sooner rather than later. Thankfully, though, the Federal Reserve Chairwoman focused on a topic of concern that supports keeping to the current plan. Yellen focused her speech on the foggy and hard to discern slack in the labor force, which she explained measures of job growth and unemployment may be missing. It's an argument for measured movements by the Fed, with a lean toward cautious dovishness. Without any sign of inflation, the Fed has little impetus to raise interest rates given an unsatisfactory labor situation, if it exists. Here are the words from her speech I found most important to trading.
As the recovery progresses, assessments of the degree of remaining slack in the labor market need to become more nuanced because of considerable uncertainty about the level of employment consistent with the Federal Reserve's dual mandate. Indeed, in its 2012 statement on longer-run goals and monetary policy strategy, the FOMC explicitly recognized that factors determining maximum employment "may change over time and may not be directly measurable," and that assessments of the level of maximum employment "are necessarily uncertain and subject to revision."4 Accordingly, the reformulated forward guidance reaffirms the FOMC's view that policy decisions will not be based on any single indicator, but will instead take into account a wide range of information on the labor market, as well as inflation and financial developments.5
What the Fed has done here is to prepare a reason for inaction on interest rates, even if the unemployment rate continues to improve and inflation edges higher. Now, the Fed has its go-to foggy and unclear labor market slack point of notation to keep it from acting faster than investors would like. This labor market issue is one that I've been focusing reader attention on since before it became a hot and popular topic. It's nice to see it finally getting its deserved notation, but it comes at a time when it's much less noteworthy, in my opinion. I'm not sure the Fed can do much to cure structural changes in employment, which require significant fiscal support and drive from the Federal and local governments, plus natural incentives that will develop from an improved economy.
Yellen might have also warned her audience that the latest geopolitical crisis in Ukraine, which positions Russia against the West, with its sanctions and terrifying other possibilities, threatens economic recovery. She could have pointed to Russia as yet another reason to keep to the plan, with the possibility of holding off on rate hikes if economic repercussions of the standoff require it. But she did not. So the coast was clear then for stocks.
SPDR S&P 500 (NYSE: SPY)
SPDR Dow Jones (NYSE: DIA)
PowerShares QQQ (NASDAQ: QQQ)
iShares Russell 2000 (NYSE: IWM)
SPDR Barclays High Yield Bond (NYSE: JNK)
PowerShares DB US$ Bullish (NYSE: UUP)
SPDR Gold Trust (NYSE: GLD)
iPath S&P GSCI Crude Oil TR ETN (NYSE: OIL)
Janet Yellen wouldn't be the only voice to sound on this day though. ECB Chief Mario Draghi would also address the forum in Jackson Hole. Draghi is much closer to the issue of concern just discussed, but he also focused his discussion on employment. It seems the two central bank bosses coordinated their discussions. Vladimir Putin, on the other hand, is much less predictable, at least for traders to figure out.
What Putin had to say was that any further delay in the delivery of aid to Russian separatists in Eastern Ukraine would be unacceptable. He delivered that message directly to Angela Merkel. The now famous Russian white truck convoy, only partially inspected and after ignoring Ukrainian demands to turn over its goods to the Red Cross, rolled its trucks against U.S. protest across the Ukraine border. And it appeared to me to be under the cover of heavy Russian artillery shelling of Ukrainian positions. If that was not troubling enough, there are reports that NATO has observed a renewed 'alarming Russian military build-up' near Ukraine; I track all the latest geopolitical and other news here.
So, while Yellen was supportive to stocks Friday, Vladimir Putin wasn't so friendly and might have an awful lot more to say soon. Yellen's position was not so supportive of the dollar, since she didn't threaten faster rate rise; Putin's aggression threatens Europe and so supported the dollar, and thus the rise in the UUP security resulted. Yellen's stance did not threaten gold, and Putin's certainly drove the metal, and thus the rise in the GLD security. Stocks closed lower after some uplift around the time Yellen spoke. Thus, taking all the action into account, I think it's clear Putin flexed more muscle than Yellen did today to influence the market. Given, I expect him to continue to do so near-term, I remain in my cautionary stance here for stocks… and the victory goes to Putin, at least for now. For more like commentary, readers may follow my column.