Daily State Of The Markets: The Slog Phase Continues Thanks To...

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by: David Moenning

The Fed, U.S. dollar, Trump diplomacy, and of course, earnings are in focus in the early going this morning. And if the futures are any indication, the recent sideways slog looks like it will continue today as the market searches for direction.

In case you missed it yesterday, the Fed kept rates unchanged at its first FOMC meeting of 2017. The unanimous vote (there were no dissenters this time due to the fact that the voting lineup changed for CY 2017) left the Fed Funds rate at effectively 0.625%, which was expected.

The main event though was the statement released at the close of the meeting. While I won't bore you with every word change (feel free to explore this exercise on your own here on WSJ.com) it is important to note that the statement leaned toward the hawkish side this time. The bottom line is the FOMC is more confident that inflation (remember, the Fed's favorite indicator here is the PCE Index) "will" (as opposed to "is likely to") move back above the 2% target in the near term. And with the unemployment rate currently below the Fed's target, the argument for more rate hikes in the near-term would appear to be quite strong. In fact, some economists argue that the FOMC should have hiked rates yesterday and the economy can easily handle higher rates.

Looking ahead, the general consensus is for Yellen & Co. to hike rates 3-4 times in 2017 with most looking for the next hike to occur in June. However, given the string of better than expected economic data of late, I wouldn't be surprised to see the discussion begin toward a move in March. As such, we should listen carefully to what the Fedheads have to say in public in the coming weeks. My guess is that the members of the FOMC will be trying to prepare markets for a move as early as March. So, stay tuned.

Next up is the dollar. Don't look now fans, but after a strong run to the upside from September, the greenback has been moving steadily lower in 2017. In fact, the dollar dropped again yesterday to a level not seen since the election. The driver here appears to be the idea that the Fed is in no hurry to hike rates. However, Goldman is out with a note today telling investors to look past the current "noise" and bet on a stronger dollar. Their thinking is that an era of "reflation" has begun.

And then there is Mr. Trump's antics. The guy who is viewed as possessing the ability to say anything to anybody, at any time, is now sitting in the oval office. The latest reports indicate that Mr. Trump suggested to Mexico's President that he stands ready to send U.S. troops in to stop the "bad hombres down there." Of course, Mexican officials deny the comment had threatening undertones.

Speaking of threatening, Trump apparently blasted Australian PM Turnbull on a phone call. A report by the Washington Post said that the President berated his Aussie counterpart over a refugee deal and then hung up on the P.M. You knew this President was going to be interesting, right!

Turning to the markets, it appears that another period of "consolidation" is underway. Recall that the trend over the past year or so is for stocks to advance, then pause for a spell, then eventually resume trending higher. And up until recently, the market had thrown in a "scary" patch before the rally recommenced. So, it will be interesting to see if the bears can find a way to scare folks before the bulls regain control of the ball.

Current Market Drivers

We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can both identify and understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).

1. The State of Trump Administration Policies

2. The State of the U.S. Economy

3. The State of Global Central Bank Policies

4. The State of Bond Yields

Thought For The Day:

"Time is your friend; impulse is your enemy." -Jack Bogle