Today's market actions -- stocks up, bond prices down, oil up, dollar up -- appear to be a reaction to soft data, as weaker-than-expected Euro area PMIs lifted expectations of an ECB ease on March 10. Softer US economic data expected on Tuesday and Wednesday -- Existing and New Home Sales, Consumer Confidence -- similarly could boost the market consensus that the Fed will not hike rates on March 16, thereby helping to extend these market moves. However, stronger data are likely on Thursday (Durable Goods Orders) and, particularly, on Friday (Core PCE Deflator) that could risk reversing some of these market moves.
With next week's February Mfg ISM and Employment Report risking to be strong enough to argue for a March Fed hike, as well, the markets may very well trade more cautiously beyond this Friday. The question could become whether the stock market would weather a Fed rate hike. Here are some possible reasons why it may:
1. A March rate hike may be already built into the markets for the most part. This is because a hike would fit with the Fed's forward guidance, which the markets reacted to earlier in the year.
2. Economic growth appears to have sped up so far in Q116, as indicated by the 2.6% Atlanta Fed GDP Now estimate. While this may prove temporary, as it reflects a weather-related bounce in consumer spending and an uptick in inventory investment, the markets might view the stronger growth background as supporting the Fed's projection of rate normalization with little drag on GDP Growth. With economic growth little affected by the rate normalization, the stock market should take the latter in stride.
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