Markets appear to be caught in limbo on Thursday, with European equities mixed and US futures pointing to a similar open on Wall Street.
The minutes from the Federal Reserve on Wednesday, which we were hoping would provide additional clarity on its interest rate expectations, instead displayed the uncertainty the central bank has about how to proceed, largely due to the unknown effects of what Donald Trump's stimulus plans will have on the economy and inflation. In effect, the Fed is as much in limbo as investors are because markets have rallied strongly at the prospect of "phenomenal" tax cuts and major spending but as of yet, nothing has been delivered.
The way markets are continuing to grind higher, it would appear investors are unwilling to go against the rally but at the same time, there's little conviction in it either. At some point, in the absence of details on Trump's tax and stimulus plans he rally may run out of steam. Hopefully Treasury Secretary Steve Mnuchin will today offer some insight into what these plans may entail in order to give investors a taste of what's to come and justify the levels we now find ourselves at.
Beyond that I think we can expect the Fed to proceed with caution and come the March meeting, if it has no details on Trump's stimulus plans it will likely wait until May or June. However, as we've seen from recent efforts, it is keen to keep March on the table because should Trump announce substantial measures, the Fed may wish to hike in March in order to avoid falling behind the curve and needing to raise at a faster pace later this year.
We'll probably get more of the same rhetoric when we hear from Robert Kaplan and Dennis Lockhart later today. Kaplan – a voting member on the FOMC – has previously kept his cards close to his chest warning that rates should rise sooner rather than later while also driving home the need to tighten gradually. We'll also get jobless claims data today as well as oil inventory data from EIA after API reported a small build on Wednesday.
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