BNY Capital Market Perspectives

Circling Hawks

Expectations from Washington and the associated reflation trade remain one of the market’s primary catalysts, despite the lack of policy details. While we continue to be challenged without said granularity, investors appear comfortable keeping the current theme alive. There had been some risk off activity over the past few days, but as has been the case since November, investors remain patient in waiting for the plans around proposed spending and tax changes. Yesterday’s speech from President Trump echoed many of the same broad themes of large stimulus and tax reform but was short on the minutiae that we crave. Having said that, the market’s patience remains undeterred in our view, which ultimately keeps the risk trade intact. This has allowed the focus to shift towards the central banks with expectations of a March hike intensifying over the past several days. As of this writing, the odds of a hike based on fed futures point to an 80% chance of a hike, substantially higher than the 34% odds that were placed on this event immediately following both Chairman Yellen’s Senate testimony (February 14th) and the minutes to the January FOMC meeting (February 22nd). Odds were actually just at 40% at the end of last week before jumping to the current levels over the past few days. There has certainly been hawkish rhetoric from Fed speakers, including NY and SF Presidents, who are centrist to dovish leaning and continue to espouse that the time for the next hike is near (with SF Williams specifically stating that March will receive serious consideration). This follows Yellen’s congressional testimony and January minutes, which were interpreted as hawkish leaning.

Continue reading »