Daily Market Color

Top Fed Officials Confirm Near Term Rate Hike Expectations

Speeches from the Fed’s two most prominent officials captured the attention of global markets today, beginning with Vice Chair Stanley Fischer, who confirmed the hawkish commentary delivered from other officials earlier this week.  Fischer acknowledged the strength seen in US economic data over the past three months, and explained that “the advice that has been given by a large number of members of the Fed, of the FOMC, is correct, and I strongly support it” with regard to the signaling of a more likely chance for a March rate rise.  Fed Chair Janet Yellen echoed a similar tone later in the day when she stated that a rate hike would be appropriate at the FOMC meeting later this month if “employment and inflation are continuing to evolve in line with our expectations.”  Addressing the political concerns overseas such as the French presidential election, Yellen stated “On the whole, the prospects for further moderate economic growth look encouraging, particularly as risks emanating from abroad appear to have receded somewhat.”  Overall, the market’s expectations for a March rate hike has risen from 35% at the beginning of this week to a current probability of 94% as implied by fed funds futures contracts.  Treasurys sold off at the beginning of today’s session before paring losses to trade relatively unchanged on the day, with the yield on the 10-year note returning to a 2.48% level.  The US dollar ended its five-day rally, falling the most against the Mexican peso, which jumped 1.9% this morning following positive NAFTA comments from new US Commerce Secretary Wilbur Ross.  Major US stock indices posted marginal gains on the day, locking in their sixth consecutive week of gains.  Conversely, gold prices traded lower for the fourth day in a row, concluding the commodity’s worst weekly performance since November. 

The Institute for Supply Management’s (ISM) non-manufacturing index highlighted Friday’s economic data releases, displaying the largest monthly rise since October 2015.  February’s level was reported at 57.6 (expected 56.5), representing a 1.1 points increase from the previous month, as new orders (+2.6 points) and business activity (+4 points) bolstered American service companies.  Robust reports from both the ISM manufacturing and non-manufacturing indices this week signal accelerating growth in the US economy, corresponding with recent rhetoric from Fed officials as the case for a March rate hike gains support.  Looking forward, next Friday’s payrolls and unemployment reports stand as the last remaining critical data releases prior to the FOMC’s March 14-15 meeting.  Median forecasts are calling for an increase of 190,000 in payrolls and a drop in the unemployment rate to 4.7% for February.       

Have a great weekend.

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