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 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%.

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. The information contained herein has been compiled from sources believed to be reliable; however, there is no guarantee of its accuracy or completeness. 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. The material provided in Daily Market Commentaries or on this website should be used for informational purposes only and in no way should be relied upon for financial advice. Please be sure to consult your own financial advisor when making decisions regarding your financial management. Members of FINRA and SIPC, Capitol Securities Management is a privately owned full-service retail brokerage and investment advisory firm headquartered in Richmond, Virginia. For nearly 30 years, we have been serving the needs of our investors. Today, more than 200 Capitol Securities Management investment professionals and support staff serve approximately 18,000 customer accounts from Southern Florida to the New England coast.