Watch the Central Banks…Part 2

There is without a doubt, clear evidence that the recent reversal in monetary policy outlook by the Federal Reserve has created positive investor sentiment.  This week, the Fed left interest rates unchanged and mentioned not only being patient with further hikes, but also discussed the possibility that their balance sheet may remain bigger than expected.  In other words, rate hikes could be on hiatus and the quantitative tightening process may come to an end sooner rather than later.  As I’ve mentioned in updates past, liquidity matters, and the Fed looks to be a supporting factor for the market, at least for now.

The Dow Jones Industrial Average advanced for the sixth consecutive week, though it wasn’t without some concerns.  Weak data out of China on Monday as well as weaker than expected earnings and forward guidance from Caterpillar and Nvidia sent the Dow almost 400 points lower before buyers stepped in.  Consumer sentiment also fell to the lowest level in two years, which could be problematic for consumer spending.  However, hiring remains robust as the economy added 304,000 jobs in January.  With prior revisions the three-month average stands at a positive 241,000 jobs.

Even though earnings results have been mixed, consumer sentiment has fallen and data out of China continues to weaken, central banks look to be back in accommodation mode and employment remains firm.

What we know so far is that the Federal Reserve looks to be done raising rates and the European Central Bank opened the door to new stimulus.  In addition, central banks in South Korea, Malaysia and Indonesia kept rates unchanged after raising them in 2018 while Canada and England are also not raising rates.  There is no end in sight for the Bank of Japan’s asset purchases and negative policy rate.  Finally, China’s central bank has taken steps to improve credit to businesses.

The decade long experiment of central bank intervention looks to have a second wind after volatility roiled global markets in 2018.  Markets have calmed, and volatility has subsided for now.  With recent strength however, the market should consolidate a little here in the short run.

p.s. The government shutdown is over for now.