Talk about ignoring the elephant in the room. Investors pushed the Dow above 21,000 and boosted both the S&P 500 and Nasdaq in an enthusiastic reception for Donald Trump’s first presidential address to both houses of US Congress, but ignored the growing belief that the Fed will lift interest rates in two weeks time.
That was after The S&P rose 3.7% in February, the best in 11 months. The Dow added 4.9% for its best monthly performance since November, while the Nasdaq added 3.8% for its 4th monthly gain in a row. There was a strong start of March on Wednesday.
Even though it has been clear for a while that the chances of a rate sooner than later, were rising. This week they surged as a number of senior Fed officials all but said there would be a rate rise emerging from this month’s meeting of the central bank’s key policy committee.
The Fed meets on March 14 and 15 with new forecasts, interest rate ‘dot plots’ and a media conference by chair, Janet Yellen after the meeting ends at 6am Sydney time, when the usual statement will be pushed.
Speeches so far this week from a trio of senior Fed officials, including the powerful Fed New York head, Bill Dudley, have raised the market’s belief of a rate rise this month to 80% from less than 50% a week ago.
And with several more Fed members to speak tonight tonight (Friday) including, chair Yellen and her deputy, Stanley Fischer, analysts and economists reckon there is a very good chance the third rate rise since 2008 will happen in a fortnight.
The most telling comments came from Dudley at the New York Federal Reserve who told CNN that the case for policy tightening had become “a lot more compelling”.
He said data released over the past couple of months have shown that the US economy is on a solid trajectory, and the central bank is more confident now that it will continue to brighten.
“It seems to me that most of the data we’ve seen over the last couple months is very much consistent with the economy continuing to grow at an above-trend pace, job gains remain pretty sturdy, inflation has actually drifted up a little bit as energy prices have increased,” he said on CNN.
Mr Dudley added that he reckons fiscal policy will “probably move in a more stimulative direction”… “So, put it all together, I think the case for monetary policy tightening has become a lot more compelling,” Mr Dudley said.
And Federal Reserve Governor Lael Brainard said the US economy appears to be in transition to a more stable growth path and gradual interest-rate hikes are likely to be appropriate “soon.”
“We are closing in on full employment, inflation is moving gradually toward our target, foreign growth is on more solid footing, and risks to the outlook are as close to balanced as they have been in some time,” Brainard said in a speech at Harvard University.
Brainard had been reluctant to raise interest rates, saying that there were risks to the American economy from weak global growth. But now, those “near-term risks” from abroad appear to have diminished, she added.
But investors ignored this softening up campaign. Instead they were swept up by the Trump speech (despite a lack of detail) and the Dow jumped by nearly 1.6%, the S&P 500 by close to 1.5% and the Nasdaq by nearly 1.4% in a big start to March.
The Fed released its so-called Beige Book (it’s a collection of anecdotes about the health of the economy and activity from the organisation’s reporting districts) on Wednesday.
“(B)usinesses were generally optimistic about the near term but to a somewhat lesser degree than in the prior report,” the report revealed. The Beige Book is based on information collected between January 10 and February 17.
It shows the US said the US economy is still meandering along and there were few of the more-upbeat sentiments that some economists had expected.
The report fits with the most recent estimate from the Atlanta Fed of GDP growth below 2% in the first three months of the year, and the results of the second estimate of US 4th quarter GDP of 1.9% (annual).
But the data so far (jobs, especially) show no sign of any overheating (or sluggishness, apart from some parts of the legacy retailing sector). Car sales though seem to have flattened out which could be foretaste of falls in demand later in the year.
