While many market and economic measures have recently moved back to pre-recession
levels, we do not expect any major changes to central bank policy. Quite the
opposite, we think that the lack of inflation and the mixed employment picture
can keep the Fed liquidity spigots flowing for an extended period of time. The
release of today’s Fed minutes solidified the view that the Fed remains as
dovish as they have ever been. Six months does not, in fact, mean six months,
and dots are less important than words, as the minutes revealed that there was
little change in the committee’s accommodative reaction function. We feel that
many of the global markets have taken on a more risk-tolerant tone as of late,
with riskier currencies and assets, along with the emerging markets,
outperforming since last week’s employment report. We cite the all-time low
yields from Spain and Italy, along with Greece’s plans to return to market for
the first time since 2010, as affirmation of this risk tolerant overtone. U.S.
stocks have been suspiciously absent from this risk rally, although this
underperformance may change as earnings season gets under way. With a negative
EPS expectation for the S&P 500, the earnings bar is set fairly low,
although much of the analyst community will focus on finding data points
showing a full reversal of the weather’s impact on revenues. Corporate and high
yield spreads remain at 2007 tights, a trend that will likely continue given
the continued dearth of new issues and growing risk appetite. Read
the full commentary now.
As always, please feel free to contact us with any questions, comments and suggestions.