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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%.

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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.