Financials –
Overall I would have to characterize yesterday’s FOMC statement as relatively dovish. The key point in the statement was the Fed keeping the same language showing “economic conditions will evolve in a manner that will warrant only gradual increases” in rates. March rate hike odds have fallen since the statement release and with the market looking beyond March now it might seem reasonable to only expect 2 rate hikes this year (Jun & Dec). As you know, I’ve been of the opinion that we could see 3 hikes this year and I must admit the confidence is lowered following this statement. Fed Funds futures are basically pricing in 2 rate hikes this year, so these might actually be appropriately priced for now. I had thought inflation expectations and the new administration might change sentiment on the FOMC, but instead for now it appears we’re looking at the same ‘ol Fed.
If indeed we’re looking at the same ‘ol Fed, then some of the new price action we’ve seen lately might come into question, right? Is the short-bonds trade stretched without higher rates? Is the crowded long-USD trade in trouble without a hawkish Fed now that the technicals might be turning? The long-financials (XLF) trade would prefer higher rates too. If any of these start to unravel, even temporarily, it will make for some interesting volatility.
No major market data today in the US, though the BOE will announce their monetary policy this morning (no change expected). Tomorrow we have NFP, with expectations running high after yesterday’s ADP print.
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