Economist's Insights

Rumors of ECB Tapering Offset a Dovish Yellen but Weak U.S. Data Solidified Lower Yields

Jul 14, 2017

Tuesday’s trifecta of Fedspeakers, all of which took a cautious tone on the outlook for inflation, preceded Fed Chair Yellen’s Congressional testimony on Wednesday and Thursday. In her prepared remarks, Yellen said there was considerable uncertainty about how inflation will respond to continued improvement in the economy and noted that a low neutral rate meant the Fed didn’t have much further to go in normalizing the overnight rate. These comments sent yields sharply lower. Thursday morning rumors of a potential tapering announcement by the ECB at its September meeting reversed this move and longer yields completely erased Wednesday’s drop. But another weak inflation report and disappointing round of retail sales data weighed on sentiment and sent yields tumbling early Friday morning. With markets further discounting the chances for actual Fed tightening to match their current projections after the week’s dovish Fedspeak and weaker economic data, the Treasury curve flattened, stocks finished at record highs, and the Dollar slipped to its lowest level since September. Click here for the full recap.