Risk markets had another strong month in February, boosted by expectations of a dovish Fed and a d’tente between the United States and China. The S&P 500 is up more than 10% year-to-date, and fixed-income spread sectors are also off to a good start in 2019 following a dismal showing last year. While market volatility has subsided and financial asset performance has improved, domestic economic data have worsened somewhat in recent weeks, at least relative to expectations.
The sharp decline in the Citigroup Economic Surprise Index in mid-February was mostly attributable to a big downside miss in the December retail sales report, and the index is now at the lowest level since August 2017. To be fair, an early-year decline in this index is not unusual. In the current expansion cycle (beginning July 2009), the Surprise Index has fallen to start every year except 2011 and 2017 (eventually declined in Q2 during both years), but with the Fed now voicing a more data-dependent approach, market participants are more myopically focused on such trends.
- Risk markets maintained positive momentum in February on expectations of a dovish Fed and a trade agreement between the U.S. and China.
- U.S. economic data trend has slowed relative to expectations in recent weeks.
- January 30 FOMC minutes suggested the Fed may be less dovish than perceived on interest rate policy, but this was largely offset by some surprises in the balance sheet normalization discussion.
As noted in last month’s commentary, the January 30 FOMC meeting produced more dovish guidance than expected, particularly as it relates to balance sheet normalization. As such, there was heightened anticipation of the minutes from that meeting, which were released three weeks later in mid-February. The minutes revealed that Fed leaders weren’t quite as dovish on interest-rate policy as initially perceived, but there were some interesting revelations regarding balance sheet plans. For rate policy, the minutes clarified that many participants observed that if uncertainty abated, the Committee would need to reassess the characterization of monetary policy as patient.
In other words, another rate hike may be necessary if inflation moves higher than expected or if the economy evolves as currently expected by the FOMC.
This market overview is provided by ALM First Financial Advisors, LLC, the investment advisor for Trust for Credit Unions. Read more from ALM First about the latest economic data releases and overall market trends at Trustcu.com.