Incisive market commentary from David Morrison

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Bounce in oil helps to steady equities - AM Briefing
30 Mar 2017
US stock indices consolidate - Video Update
29 Mar 2017
Risk appetite returns - AM Briefing
29 Mar 2017
S&P500 - Topping out, or consolidating? PM Bulletin
28 Mar 2017
Risk appetite returns after the Trump wobble - AM Briefing
28 Mar 2017
Beware hidden relationships between seemingly unrelated markets - Trading Guides
27 Mar 2017
Risk assets slump in wake of Trump’s healthcare debacle - AM Briefing
27 Mar 2017
Congress vote puts markets on hold - AM Briefing
24 Mar 2017
Markets on hold ahead of crucial vote - Video Update
23 Mar 2017
Tranquil markets await big data - AM Briefing
23 Mar 2017
Investors rattled after equity sell-off - Video Update
22 Mar 2017
US Markets Snap 109-Day Streak - AM Briefing
22 Mar 2017
Crude oil update - PM Bulletin
21 Mar 2017
European markets stable on the open - AM Briefing
21 Mar 2017
Dollar slips after G20 communique - AM Briefing
20 Mar 2017
FOMC post-mortem - Video Update
16 Mar 2017
Rate hike sends stocks higher - AM Briefing
16 Mar 2017
FOMC rate decision and Dutch election in focus - Video Update
15 Mar 2017
Oil rally gives markets lift - AM Briefing
15 Mar 2017
Crude trades at lowest levels since production cut agreement - PM Bulletin
14 Mar 2017
Politicians take centre stage again - AM Briefing
14 Mar 2017
Trading Psychology: Risk Management - Trading Guides
13 Mar 2017
Article 50 deadline approaches - AM Briefing
13 Mar 2017
European stocks push higher after Draghi’s hawkish stance - AM Bulletin
10 Mar 2017
Non-Farm Payroll look-ahead - PM Bulletin
09 Mar 2017
Fed rate hike seems certain - AM Briefing
09 Mar 2017
Market expects Fed to hike rates next week - Video Update
08 Mar 2017
Another twist in the French election - AM Briefing
08 Mar 2017
Odds slashed on Fed rate hike - PM Bulletin
07 Mar 2017
Investors lacking direction this morning - AM Briefing
07 Mar 2017
Fibonacci Retracement - extensions - Trading Guides
06 Mar 2017
Equities slip in early Monday trade - AM Briefing
06 Mar 2017
Modest profit-taking sees US indices post rare loss - AM Briefing
03 Mar 2017
Crude struggles to break above resistance - Video Update
02 Mar 2017
UK baffled by the origins of their favourite brands - PM Bulletin
02 Mar 2017
Fresh record highs for major indices - AM Briefing
02 Mar 2017
All eyes turn to the Fed - Video Update
01 Mar 2017
Markets react positively to Trump speech - AM Briefing
01 Mar 2017
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According to the CME’s FedWatch Tool there is currently around an 86% probability that the US Federal Reserve will raise rates by 25 basis points when its two-day meeting concludes next Wednesday. This is up from around 20% just over a week ago so illustrates a dramatic shift in sentiment.

The FedWatch Tool is based on fed funds futures which are traded on the CME. It is perhaps the most accurate of all the measures of Fed rate hike probability as it reflects the weight of real money being wagered on a specific outcome. Once the number gets into the 80s then a corresponding move from the Fed is pretty much nailed on.

What is perhaps unusual is how the odds flipped from a 1 in 5 chance of a rate hike to a 4 in 5 chance in little more than 24 hours. The pivotal moment was a speech from FOMC-voting member William Dudley which came just a few hours ahead of Donald Trump’s highly-anticipated speech to Congress. Bill Dudley is President of the New York Federal Reserve and vice-chair of the FOMC. This makes him one of the three most important and influential members of the Federal Reserve, alongside Fed Chair Janet Yellen and Vice-Chair Stanley Fischer. Consequently, investors pay close attention to anything he has to say. Last Tuesday evening he said that the case for tightening had “become a lot more compelling." Mr Dudley is considered to be one of the more dovish members of the FOMC and his comments led to a rapid recalculation of the odds on a rate hike at next week’s meeting.

Then on Friday Janet Yellen delivered a speech which did nothing to dampen expectations of an imminent rate hike. She said that an increase at the March FOMC meeting “would likely be appropriate”, as long as incoming data continue to confirm officials’ outlook. While this does suggest that the Fed could hold off if this week’s Non-Farm Payroll number disappoints, that is extremely unlikely. If the headline number was to come in a long way below expectations it would most likely be considered rogue. The six-month average continues to come in around 170,000 which is considered healthy and the expectation is that Average Hourly Earnings will bounce back after last month’s disappointment.

Meanwhile, President Trump’s address was regarded as his most conciliatory and unifying since his victory speech back in early November. It was also considered to be his most presidential as it was optimistic in tone, addressed the administration’s plans for America’s future while there were no snipes at either the media or the prior administration. The speech was light on detail, but it was more than enough to convince investors that fiscal stimulus is on its way.

But this may prove to be a problem. At the Fed’s December meeting when the central bank hiked rates for the first time in a year, Janet Yellen was asked if she was concerned about the risk of the economy overheating should Trump manage to push through fiscal stimulus. She said there was no obvious need for such stimulus as the US employment situation had improved. Dr Yellen’s reply suggested that Trump’s campaign promises (assuming they get through Congress) could raise inflation expectations - especially at the Fed. If investors come to feel that the central bank is prepared to raise rates more aggressively than expected, then that could be a big headwind for equities, especially as all of Trump’s policy proposals will add to US national debt. This hasn’t been viewed as an issue thanks to record low interest rates. But if these now start to rise, we could have a problem. It’s worth remembering that March 15th is not only the last day of the FOMC meeting, but also the day when the US debt ceiling suspension expires. 


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Posted by David Morrison

Category: PM Bulletin

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