Equity markets are still reconciling the April Fed Minutes, Minutes that shocked many into a different reality. Large cap momentum growth stocks fell about 1%, the dollar advanced and the bond market became paralyzed. Crude was essentially unchanged on gasoline demand which is at a record level and continued violence in Nigeria.
Wow! Talk about the unexpected!! As noted yesterday, Wednesday morning Fed Funds futures were only suggesting a 5% chance of a rate hike in July. Today it is 71%. June’s odds are currently 32% versus 4% the morning of the release.
I have commented about the complacency of the Treasury market stating there was a large probability of an “upside surprise.” The narrative was one of negativity and despair.
Yesterday’s release of the Index of Leading Indicators, an index designed to forecast economic activity 3-6 months into the future—continued to offer evidence of accelerating economic activity. Its reading was 50% higher than the consensus view, consistent with a 2.75%-3.0% growth rate.
While I am certain the banter will rise to a deafening crescendo regarding the probability of an interest rate hike in either June or July, I ask the infamous question “what difference does it make?”
Does a 0.25% increase really make a difference as to whether a project will be contemplated or whether or not it economically feasible? Will a 0.25% affect FDIC insured savings accounts given the massive liquidity in the financial system as evidenced by over $2.2 trillion in excess bank reserves versus the historical average of $1 billion?
I think the answer to both questions is a resounding no.
However any increase may impact algorithmic trading models, models that control HFTs and ETFs which in my view are the bane of the markets.
But is not rising interest rates an indicator of strength?
If the economic scenario continues to materialize as the Federal Reserve is suggesting, I reiterate value should continue to outperform large capitalized momentum growth, an outperformance greater than the last “value era” of 2002-2005 given today’s massive discrepancies in ownership levels between the two, the result of HFTs and ETFs.
What will happen today? Housing data will be released at 8:30.
Last night the foreign markets were up. London was up 1.16%, Paris up 0.89%, and Frankfurt up 0.72%. China was up 0.66%, Japan up 0.54% and Hang Sang up 0.80%.
The Dow should open flat but the averages are set for its fourth consecutive week of declines. The 10-year is off 1/32 to yield 1.86%.