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The Fed Slightly Hawkish with Many Viewing a Late Spring Interest Rate Hike as Inevitable.

Stocks fell while the dollar gained on speculation the FOMC will boost rates this year as the economy strengthens.  Treasuries rose and oil plunged under $45/barrel.

The Fed boosted its assessment of the economy stating growth is “solid” versus moderate and labor market as “strong.”  Because of the decline in oil, the FOMC expects inflation to decline further.  It is overwhelmingly evident officials are confronting divergent economic forces as the Committee weighs the timing of the first interest rate increase since 2006.

The Fed also acknowledged global risks saying it will take into account readings on “irrational developments,” a phrase I think encapsulates today’s macroeconomic environment.

Generally speaking the statement was slightly hawkish with many viewing a late spring interest rate hike as inevitability as I think the Committee barely held onto the word “patience.”

As noted above stocks fell and the dollar gained.  All must remember markets historically decline between 7% and 10% when the Fed tightens monetary policy, a decline that may be exacerbated by a stronger dollar hindering results of the multinationals.

Referring back to the term “irrational developments,” what a great term to describe today’s geopolitical and macroeconomic environment.  The inmates are running the Greek Asylum.  In my view there is little difference between President Putin’s and President Obama’s attitudes.  One is thumbing his nose with increasing intensity at the west and the other at a newly elected legislature.  Then there is oil which is now at the levels thought unfathomable just six weeks ago, levels that are threatening the very existence of countries.

And what about the Middle East which in my view is about to implode; the latest chapter is Israel at the brink of an all-out conflict with Hezbollah.

I think few will disagree that in the absence of leadership, anarchy will occur.

Are we now missing the days when the greatest issue was the name Redskins?

What will happen today?

Last night the foreign markets were mixed.  London was down 0.27%, Paris up 0.24% and Frankfurt up 0.17%.  Japan was down 1.06% and Hang Sang down 1.07%.

The Dow should open moderately higher, the result of several strong earnings reports, following the worst two day selloff in over a year.  Seventy percent of the 158 companies from the S & P 500 have beaten analysts’ estimates while 56% have topped sales projections according to Bloomberg.  The 10-year is off 6/32 to yield 1.74% and oil is essentially unchanged.

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Ken Engelke

Chief Economic Strategist Managing Director

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.