There was no Oscars-like confusion in financial markets last week, even following Donald Trump’s much anticipated State of the Union speech to Congress which surprisingly had a more structured delivery, was upbeat, but once again lacked specific details (do I look surprised?).
Despite only slight yield moves higher last week, the probability of a US Federal Reserve bank 16th March rate hike rose to almost 90% according to the futures market, up from around 50% a week earlier. There are now more than 2.5 US rate hikes priced in for 2017. Positive economic data has played some part in this, but ultimately the market is just reflecting what has been a relatively clear message from US Federal reserve officials and a desire for the market to perceive the Fed meeting as “live” for a rate hike.
This is at loggerheads with the RBA which is universally expected to leave the official cash rate on hold after their monthly board meeting this Tuesday as well as for the foreseeable future, given recent positive data releases here (refer chart below).
RBA cash rate and market pricing