Equities continue to drift higher, driven it feels by a lack of alternatives, a sense that perhaps they are not yet over owned or over loved, and in the anticipation of tax reforms. Donald Trump has now said he expects to announce his tax reform plans by April. Treasury Secretary Steve Mnuchin, appearing on CNBC on Thursday, added that he expects significant tax reforms to be passed before the August recess.
The minutes of the last Federal Reserve meeting were released on Wednesday, and continued to plug the line that rates will rise, “fairly soon”, however, leaving the definition of that phrase to the markets imagination. The market is placing less than a 50% chance of March, May and June appear to be the more favoured months. It may be that the Federal Reserve, now they have some time line to when the Trump administration plan to announce their tax plans, might want to wait before acting.
As much as US interest rates dominate the headlines, one gets the sense that, unlike in years past, the market is taking a much more pragmatic view to further moves higher. If the market is comfortable that rates can go higher, this may give the Federal Reserve an advantage in the following year to cut them again should the US economy slow. The Bank of England and the ECB have far less wriggle room, and conversely may end up having to act at a less measured pace than the Federal Reserve should inflation pressures continue to build.
U.S. bonds still appear not to reflect this continued optimism, reacting very little to each of the Federal Reserve’s statements. The yield on the 10-year treasury is now lower than where it started the year. The real test for equities would come from the bond market, any sharp moves there could cause a jolt to equity prices.
Germany’s Bundesbank released its annual report on Thursday. Jens Weidmann, the Bank’s president reiterated his criticism of the ECB’s bond buying program, going on to add that Central Banks unlike Governments cannot sustainably create more growth. On Wednesday, the euro area inflation data reported that inflation is running year on year at 1.8%. Should that figure continue to creep higher Mr Weidmann is liable to strengthen his position against the bond program.