February 9, 2018

It was another volatile overnight session in the global markets, with major Asian equity indices down 2-4%. The Dow and S&P 500 both closed in correction territory (-10%) yesterday, and for the Dow, it’s on track for its worst week since October 2008. U.S. futures are in positive territory today (S&P 500 +12 points), but sentiment is clearly fragile. Treasury prices fluctuated overnight and are now moving lower versus yesterday’s close. The federal government technically entered a shutdown yesterday, but it only lasted a few hours after Congress was able to agree to a 2-year spending bill. The legislation includes lifting spending caps on military and non-defense programs that would add $300-400 billion to the deficit.

When combined with the deficit impact of tax reform, there are growing concerns in the markets as to why the government is adding more stimulus in the back-end of an expansion cycle with labor markets at the tightest levels in many years. Regarding the impact of the recent sell off in equities on Fed policy, Bill Dudley (NY Fed President) was asked yesterday if the stock slump would stop the Fed from hiking rates in the coming months, and he responded by saying the events of this week were “small potatoes.” The interviewer then reminded Dudley of the Fed’s propensity to react to previous episodes of equity weakness (the “Greenspan/Bernanke put”), specifically in 2016 when the Fed paused its rate hikes for 12 months. Dudley countered by noting the very different landscape at the time (slowing global economy, falling commodity prices, etc.), and current anxiousness in risk markets is more attributable to higher inflation expectations and reduced monetary accommodation. Market pricing for a March rate hike fell earlier this week but have since rebounded to a 92.8% probability (Bloomberg).

Jason Haley
Managing Director, Investment Management Group