Financials Outpace the Broader Market

US equity markets registered a mixed to flat performance yesterday on a slight uptick in volume, basically treading water. The Dow Industrials slipped 0.03% while the S&P 500 (+0.02%) and Nasdaq (+0.50%) held their ground. Volume rose 0.13% on the NYSE and 1.76% on the Nasdaq. However, given the fact that the Fed Minutes released yesterday indicated that a rate hike in June was still on the table, the market’s unwillingness to trade lower was encouraging.

The combination of hawkish Fedspeak on Wednesday, language that speaks to a potential tightening in the Fed Minutes yesterday, coupled with modestly improving economic data this week has accomplished several things for investors. Firstly, it has confirmed that the current monetary policy narrative relative to equity market price action is indeed two sided for investors as I suggested in the title of last week’s note, a double-edged sword. Secondly, it has increased the likelihood of another move higher in rates over the remainder of the year. As a result of that, financials far outpaced the balance of the broader market yesterday. Financials, one of the three worst performing sectors of the S&P 500 on a year-to-date basis rallied sharply on the day reversing a trend that has been largely in place much of the year. I recently discussed why it’s a good time to look financials on  Reuters Insider Video with Fred Katayama.

Also as I have suggested over the past weeks, my sense is that the spring thaw in economic data would welcome an enlivened dialogue around the upcoming interest rate timeline.

For the past two months I have held that the Fed would most likely move in June. If we continue to see further inflationary momentum (as measured by the CPI, PPI-FD), employment gains and a continued bid for crude among other things, the Federal Reserve will ultimately have to move on rates sooner rather than later. However, I now suspect that next move is more likely to come after the Brexit referendum. That would mean July, but since there is little chance based on recent history that the Fed will act when a press conference is not scheduled, we may see the next move in rates in September.

Keep an eye on Thursday’s Weekly Jobless Claims and Leading Indicators reports. Friday we receive the Existing Home Sales data. All three data releases will be central themes and inform the interest rate narrative moving forward.