Growing Comfort With Prospect of Fed Tightening Boosts Risk Assets

US stocks are following emerging market stocks higher while Treasuries are trading flat as investors get used to the idea of another interest rate hike this summer.  Strong recent economic data and upbeat comments from Fed officials have raised expectations for a rate hike in June or July, much sooner than previously factored in market trading level.  The combination of a weaker dollar, rising commodity prices, a new debt deal for Greece, and growing UK voter support for the UK remaining in the EU, have provided stability to financial markets and created a more optimistic backdrop that the world economy can withstand Fed action in the near term.  Minutes released yesterday from the Fed’s discount rate meeting, which is different from the FOMC minutes, revealed four of the regional central banks voted for a rate increase in April, up from two in March.  San Francisco, Cleveland, Richmond, and Kansas City were the regions in favor. 

In terms of new data, the Commerce Department released its trade balance of US goods (excludes services), which showed the trade gap grew less than forecast last month.  As a result, Goldman Sachs economists raised their outlook for US Q2 GDP to 3.0% from 2.7% previously.  Aside from the data, other market events include today’s Fed speakers (Philadelphia Fed President Harker (hawk, non-voter), Minneapolis Fed President Kashkari (dove, non-voter), and Dallas Fed President Kaplan (hawk, non-voter)), as well as a $34 billion 5-year note auction that took place at 1pm ET.

All three major US stock indexes are up close to 1%, while Treasury yields and swap rates are flat across the curve.  WTI and Brent crude are both currently trading up over 1%, close to the highest levels since last October.