World week ahead: waiting for Yellen

With increasing evidence the US economy is not recovering as quickly as initially thought from a sluggish first quarter, Federal Reserve chairwoman Janet Yellen's speech on Friday will be watched closely.

Investors are less sure how the Fed is interpreting the latest data, with concerns rising that perhaps Mrs Yellen and her colleagues have been too optimistic.

Other Fed officials speaking this week include Chicago Fed President Charles Evans, today and again on Wednesday, as well as Fed Vice Chair Stanley Fischer and San Francisco Fed President John Williams on Thursday.

Also to be scrutinised will be the Federal Open Market Committee minutes from the April meeting, when the Fed's top policymakers left open the door for a June interest rate increase. The minutes will be released on Wednesday.

Last Friday, reports showed that US consumer confidence unexpectedly sank in May, posting the largest drop in two years, with the University of Michigan preliminary index of sentiment sliding to the lowest level since October. Separately, industrial output unexpectedly fell in April. And manufacturing in the New York region grew at a pace that fell short of expectations this month.

"There is some concern about the first-quarter weakness spilling into the current quarter," Ilya Feygin, managing director at WallachBeth Capital in New York, told Reuters.

Wall Street moved higher, pushing the S&P 500 to a record high, with the Fed's current policy seen intact at least for a few more months.

"It puts people's forecast for the first rate hike definitely away from June," Justin Lederer, an interest-rate strategist at Cantor Fitzgerald in New York, one of 22 primary dealers that trade with the Fed, told Bloomberg. "September is a strong possibility but it could easily be December."

For the week, the Dow Jones Industrial Average rose 0.45%, the Standard & Poor's 500 Index gained 0.31%, while the Nasdaq Composite Index advanced 0.89%.

US Treasuries finished the week with a rebound, following a selloff days earlier sparked by the euro-zone bond market. However, fresh signs that the Fed is unlikely to move soon on rates supported the appeal of US government debt.

"The market is getting more concerned that the economy weakened through the first quarter into the second quarter, and that pushes the Fed back further and people get more comfortable jumping back into treasuries here," Charles Comiskey, head of Treasuries trading at Bank of Nova Scotia in New York, told Reuters.

The coming days will offer a fresh update on the still-sluggish US real estate market. The housing market index is due today, followed by housing starts on Tuesday and existing home sales on Thursday.

Other reports scheduled for release include weekly jobless claims, Chicago Fed national activity index, Philadelphia Fed business outlook survey, and leading indicators, due Thursday; as well as the consumer price index and PMI manufacturing index, due Friday.

After Friday's disappointment in consumer sentiment, several key retailers are set to report their latest quarterly earnings in the coming days, with both Wal-Mart and Home Depot set for Tuesday, followed by Lowe's on Wednesday.

In Europe, the Stoxx 600 Index declined 0.9% last week, while the UK's FTSE 100 index shed 1.2%. Euro-zone bonds dropped as well, pushing yields on the benchmark German 10-year bund eight basis points higher to 0.63%.

"We've definitely had a deflationary shock. Nominal government bond yields globally, especially in Europe, have been trading down to what have proven to be absurdly low levels," Stephen Jones, the Edinburgh-based chief investment officer at Kames Capital, told Bloomberg. "You come back to the core – no inflation, which actually with modest growth and continued central bank support isn't bad for asset markets."

Here, reports scheduled for release include the euro-zone trade balance, euro-zone CPI, and Germany's ZEW economic sentiment, due Tuesday; Germany's producer price index, due Wednesday; euro-zone manufacturing and services PMI data, and euro-zone current account, and euro-zone consumer confidence, due Thursday; Germany's GDP, and German IFO data.

(BusinessDesk)