10 Apr IS STRONGER THAN EXPECTED GROWTH THE GREATEST RISK TO THE MARKETS?
Several times I have opined the greatest risk to the markets is greater growth than anticipated that challenges monetary policy expectations. As widely accepted a major reason for the December rout was growth and the December 21 FOMC statement that Treasury sales were on “auto pilot” and expectations of at least two interest rate increases in 2019.
Following the disastrous late December rout, including a December 24 call to the largest banks asking if these banks were experiencing any liquidity issues, the Fed radically changed directions on January 4 utilizing the word “patient.”
About a month ago recessionary talk was the predominate narrative with many quoting the Atlanta Fed’s model of projecting 1Q GDP at a 0.2% annual rate, the slowest growth since first quarter 2014.
Fast forward to today, the same model is projecting a 2.0% 1Q growth rate with momentum accelerating, the result of strength in several tier I data points such as the ISMs, jobs, car, home and retail sales. Moreover wages rose by 3.2% in March/March quarter as compared to a 2.8% in the year ending March 2018.
Right now, the market is suggesting a zero chance of a rate hike in 2019 and greater than 50% chance of a rate cut. I will argue that this view can change. At the end of 2017, the market put the odds of four or more rate hikes in 2018 at 10-1 against. Rates went up four times.
If the narrative again changes, how will equities respond? What happens if this narrative changes during the upcoming earnings season, a season which JP Morgan states will be challenging for technologies that have propelled the rebound since the December lows?
Many times I have opined about the velocity of change. JP Morgan et.al. have warned about possible rising volatility, the result of yet another change in macroeconomic outlook amplified by the dearth of liquidity.
Last night the foreign markets were mixed. London was up 0.10%, Paris up 0.43% and Frankfurt up 0.46%. China was down 0.21%, Japan down 0.53% and Hang Sang down 0.13%.
The Dow should open on a positive note ahead of a potentially busy day, a day that includes the release of US inflation data, an ECB rate decision and the Minutes from the recent FOMC meeting. The 10-year is unchanged at 2.51%.