The Fed on hold for now

The minutes from the January Fed meeting indicated a reluctance, on balance, to sanction further interest rate cuts, with inflation remaining ahead of the 2% target and, on the face of it, economic growth at least holding up. The release of the Personal Consumption Expenditure Index later today could influence the mood at the next meeting. The other swing factor is employment, and Thursday’s Jobless Claims 4-week Average came in pretty much in line with market expectations.

The increase in the Philly Fed Future General Activity Index to 42.80 points in February continues to indicate that regional manufacturers remain optimistic about business growth over the next six months. The current macro data still suggests the US economic outlook remains robust. Later today, we get the monthly flash PMIs, not only for the US economy but for global economies as a whole.

The US Citi Economic Surprise Index has generally been on an upward trend since the start of the year. The global surprise index also continues its upward trend as well. A colleague of mine used to describe trading conditions as a market of stocks rather than a stock market. I used to hate that phrase, but it sort of sums up what’s going on right now. Headline index moves don’t really tell the full story, but beneath the surface, there’s an awful lot of volatility within individual sectors and names. Particularly, the divide between companies investors think will benefit from the AI boom and those whose business models will be disrupted. One result is that, for good active managers, this volatility has brought opportunity; the proportion of large-cap active mutual funds that are outperforming their benchmarks this year is at its highest level since 2007. Life for active managers was made very difficult by the narrow leadership of stocks.

So far, equity markets have barely reacted to the increased rhetoric around Iran and the potential for conflict between the US and Iran. Prediction market bettors now put the odds of a US attack at around 70%, while crude oil prices are rising. Brent surged 4.3% on Wednesday to top $70 once more. Once again, providing evidence that equity markets tend to discount geopolitical risks. At some point, should oil prices continue to spike, there could well be an impact on other asset classes.

Despite a weaker close in the US equity markets, European markets appear to be finishing the week on a positive note.