The Dow’s longest winning streak in 30 years may have come to an end and Donald Trump may well have coasted through his appearance in Congress offering no details to back up his bold policies, but investors remain undeterred on Wednesday as US indices prepare to open higher once again.
The rally in equity markets appeared to slow in the days leading up to Trump’s appearance which suggested that investors were seeking more substance to back the President’s bold plans but once again we were made to sit through more of the same rhetoric without any backlash from investors. It’s difficult to say how long they will be willing to tolerate so much talk and no action but for now at least, it appears investors have faith in him to deliver even if it’s going to take longer than planned. Should Trump fail to live up to the high expectations he’s set himself then the impact could be significant.
What’s helping to maintain the upbeat sentiment is the optimism coming from within the Fed. Not so long ago the market feared the mere prospect of a single rate hike but now they’re taking the prospect of three comfortably within their stride. Perhaps the promise of more activity on the fiscal side combined with evidence of a much improved labour market is helping allay the fears that previously held the market back.
The Fed is certainly coming across more hawkish as of late and comments on Tuesday from William Dudley and John Williams strongly backed up views from other policy makers recently that March is very much a live meeting. I think it’s clear right now that the Fed wants the market to perceive every meeting as live and even a week ago this was clearly not the case for March. At above 60% for March and 70% for May, the Fed has done a much better job at guiding market expectations and I’m sure Robert Kaplan and Lael Brainard will be keen to do more of the same today. I still think the Fed will likely move in May which would again drive home the message that every meeting is live, as this would be the first meeting without a press conference that it has raised rates in this cycle.
The dollar is rallying today on the back of these more hawkish Fed expectations and yields on US Treasuries are also higher. The US dollar index is seriously testing its range highs today, a break of which would see it trading at its highest level since 11 January and could trigger another surge in the greenback.
With plenty of data to come today – including income, spending, PCE inflation (the Fed’s preferred measure) and two manufacturing PMIs – there are plenty of potential catalysts for such a move, should the numbers warrant it.
