U.S. equities recorded their sixth week of gains, propelled by solid increases following the president’s speech to Congress on Tuesday evening. The conventional tone of the speech engendered a rise of confidence that spilled over into markets worldwide. The S&P 500 added 1.4 percent on Wednesday alone, while the EuroStoxx 50 index added 2.1 percent, and the Nikkei gained 1.4 percent.
But it wasn’t the president’s speech alone that drove stocks higher. Evidence of accelerating economic growth around the globe contributed to the rising optimism. In the U.S., consumer confidence rose to its highest level in over fifteen years, and was accompanied by an expanding composite Purchasing Managers Index (PMI) report and steady inflation. Solid manufacturing activity, rising confidence, and firming inflation in the Eurozone was joined by rising capital spending and profits in Japan, and higher PMI readings in China to suggest global activity is improving.

Fed appears ready for rate hike
Also contributing to the sentiment backdrop was the now near consensus view that the Fed will, indeed be raising interest rates next week. Three additional Fed officials, including Chair Yellen and Vice Chairman Fischer, added their voices to the growing chorus of those preparing the ground for rates to rise. In response, the percentage likelihood of a rate increase next week is now 94 percent, according to the Bloomberg World Interest Rate Probability function. Two weeks ago it was just 34 percent. The yield on the rate sensitive two-year Treasury note ended last week at 1.32 percent, its highest level since 2009, and 45 basis points higher since the election in November. The fact that stocks are not only unfazed by the expectation of a rate hike next week but, in fact, moving higher, gives the Fed the opening it needs.
In their various remarks, Fed officials have cited the progress made on its dual mandate of full employment and steady prices. The last remaining hurdle before next week’s Federal Open Market Committee meeting is Friday’s report on February employment, and unless the report contains some unexpectedly weak results, the rate hike is all but assured. In fact, the opposite could happen and the report may be on the strong side. Weekly jobless claims fell to their lowest level since 1973 last week. And average hourly wage growth is expected to rebound from unexpectedly soft 0.1 percent monthly gain recorded in January, which left year-over-year growth at 2.5 percent, down from the 2.8 percent reading in December. Investors remain skeptical that the Fed will raise rates three times this year, as it intends. The probability of three rate hikes by December currently sits at just one in three.
China projects modest slowdown
China announced a 6.5 percent official growth target for its economy in 2017. That implies an expected modest slowdown from the 6.7 percent realized growth rate for 2016 when the targeted growth rate was 6.5-7.0 percent. The official report contained warnings about excessive leverage in the economy and the need to be mindful of the risks posed by reliance on debt fueled stimulus. Of particular concern are home prices which surged by up to 30 percent in some cities last year. The report sets a continued course of transition for China’s economy away from infrastructure spending and toward more private consumption. But the growth target will no doubt be carefully monitored, if not engineered, as this year culminates with the ruling party’s leadership congress, at which President Xi Jinping is expected to solidify his grip on power as he begins his second term.
The current rally in U.S. stocks may well be tested in the days ahead. The fourth quarter earnings season is basically complete. According to Factset, earnings grew by 4.9 percent, better than the 3.1 percent expected at the start of the year. And although first quarter earnings are currently forecast to expand by an even better 9.0 percent, we have a long way to go to find out. In the meantime, to the extent that at least part of the current rally is a bet on market friendly policies from the new administration, the longer the wait for details of such policies, the more anxious investors may get. And, although the economic data has been solid of late, all the more attention the Fed will get.
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The S&P 500 is an index containing the stocks of 500 large-cap corporations, most of which are American. The index is the most notable of the many indices owned and maintained by Standard & Poor's, a division of McGraw-Hill.
The EURO STOXX 50 is a market capitalization-weighted stock index of 50 large, blue-chip European companies operating within eurozone nations. The universe for selection is found within the 18 Dow Jones EURO STOXX Supersector
indexes, from which members are ranked by size and placed on a selection list. 
The Nikkei index is a price-weighted average of 225 stocks of the first section of the Tokyo Stock Exchange.
The Chicago Purchasing Managers Index is a monthly measure of the business conditions based on surveys of purchasing managers across Illinois, Indiana and Michigan.
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