The markets are waiting for something and it’s hard to know just what. The reaction to today’s release of the Fed’s minutes was somewhat muted. Bonds, as expected, would be weaker and were a little better and equities were also a little better.

The Fed minutes showed that the Fed had more confidence in the economy and would need to keep raising rates to keep inflation under control. Almost all the members of the Committee believed that inflation would head towards the preferred 2% level. Meanwhile, the markets are expecting a rate hike come March and the front end of the bond market is clearly signalling the expectation as the 2-year treasury is now at 2.28%.

Meanwhile across the pond, the Europeans are also seeing interest rates start to move upwards. Traders are starting to move ahead of the ECB by selling opportunistically as the expectation is for the ECB to shut its 2.25 tr euro stimulus. Lithuania’s Vasiliauskas, the central bank chief, has said as much with his comments suggesting that the emphasis on bond purchases would be cut.

The point of all of this is that rates and bond yields will continue to steadily rise. Increased issuance by the Fed and increased economic growth will mean that bond yields have a way to go yet. And if the economic growth target of 3% is not met and with falling taxation revenues then bond yields could really spike. Disappointment is a bitter expectation.

For the equity markets, the release of the Minutes was a minor concern. After being strong for most of the day, the earlier gains were given up as the equity market slumped towards the close. After initially stabilising with a 0.1% gain the Dow slipped 0.8% and on the close at down 0.67%.


Equities: The S&P 500 fell 0.67% while the Dow rose 0.55% and the Stoxx rose 0.2%.

Currencies: The Bloomberg Dollar Spot Index rose 0.1% while the euro fell 0.1%

Bonds: The ten-year rose to close 2.95% while the 2-year closed at 2.28% and the 30-year closed at 3.27%. The ten-year bund closed at 0.721% and the UK gilt closed at 1.554% and the OAT closed at 0.99%.

The U.S. curve closed 2/10 at 67.2bp, 2/30 at 94.7bp and the 10/30, closed at 27.5 bp. The U.S. 5-year closed at 2.686.

Commodities: Gold was unchanged and WTI fell 0.3 %.

Bitcoin is trading around $10,343.

Aussie Market Today.

The Australian markets should be choppy today. U.S. bonds were weaker but so too was the equity market towards the close. Expect bonds to probably weaken a little early in the day before recovering.

Equity markets have to decide whether rising bond yields will affect earnings and valuations. That part has yet to be played out. If equities do rally then it should be a nervous rally.