Five consecutive sessions of new record highs would appear to be the trigger for some profit taking in US equity markets, with all three major indices currently on course to open in the red on Thursday.
There’s been a strong focus on the US over the last couple of days and for a change, the attention has been more so on the central bank and interest rates as opposed to its extremely active and often controversial new President. Fed Chair Janet Yellen concluded her two days of testifying before Congress with an appearance before the House Financial Services Committee on Wednesday and while much of the rhetoric was broadly similar to that of the day before and more time was spent discussing other matters such as regulation, it’s clear that her comments struck a chord with investors.
Rate hike expectations have become much more hawkish over the last couple of days, with expectations of a March rate hike having risen from around 13% to 31% yesterday and around 27% today, while a rate hike in May is now above 50%. Markets are also pricing in an almost 50% chance of three rate hikes by December so it’s clear that the Fed’s message, combined with the economic data we’ve had over the last couple of days, is getting through to investors. Yellen and her colleagues, many of whom have made appearances in recent days, have largely been sticking with the message from previous meetings, that three rate hikes is likely this year and it’s reasonable to expect the next at one of the upcoming meetings. Prior to the last couple of days, March seemed off the table but it would appear it’s suddenly become a “live” meeting once again.
There’s also been a lot of economic data to take on board over the last couple of days but in the main, this has supported the hawkish argument with CPI inflation exceeding expectations and being above the Fed’s inflation target and retail sales also outperforming. There’s less data to contend with in today’s session but there are a few releases of note including jobless claims, Philly Fed manufacturing index, building permits and housing starts. No Fed officials are due to appear today but I would expect it will still be a lively session, regardless.