After a brief stumble two weeks ago, their first decline in seven weeks, U.S. equities resumed their winning ways last week. The gain was not robust, just 0.2 percent as measured by the S&P 500, but it came in a week when the Federal Reserve raised interest rates for the second time in three months. In contrast, the December rate hike was the first in twelve months. And despite the now growing belief that three rate hikes this year are a distinct possibility, bonds rallied along with stocks, as investors interpreted the Fed’s stance to be somewhat less hawkish than feared.
The yield on the ten-year Treasury note had closed on Tuesday, the day before the Fed’s move, at a yield of 2.60 percent, but ended the week at 2.50 percent. The two-year note yield fell from 1.38 to 1.32 percent. High yield bonds also rallied last week following the Fed announcement. Between March 1 and March 14, the day before the Fed’s action, the yield on the Bank of America Merrill Lynch High Yield Master II index had climbed by a steep 44 basis points to 6.43 percent, and the spread over government notes had widened by 48 basis points to 405, partly due to concerns about weakness in energy prices, as well as general concern that spreads had simply narrowed too much. However, by week’s end the yield-to-maturity on the index had fallen back to 6.23 percent, and the spread over governments had slipped to 391 basis points.
Timing of the next rate hike
The Fed has three remaining meetings throughout the year that are accompanied by updated economic projections and press conferences, in June, September, and December. While the Fed insists that all Federal Open Markets Committee (FOMC) meetings are live, meaning opportunities for changes in monetary policy, it is widely assumed that the press conference meetings are the more likely candidates. Although some believe the Fed is in danger of falling behind the curve, unless the economic data accelerates sharply, especially on the inflation front, it seems unlikely that the Fed would want to raise again as early as June. Three rate hikes in six months after just one in the previous twelve might be too aggressive a shift in policy. Nevertheless, futures suggest better than even odds that another rate hike will come in June. More likely, the Fed waits to observe conditions a little longer, targeting September for its next move.
Consumer Price Index reading
On the same day as the Fed’s announcement last week the Labor Department reported that the headline consumer price index for February increased by 2.7 percent year-over-year, the highest level since March, 2012. However, in its meeting statement, the FOMC seemed little concerned, saying it expected inflation to stabilize around its 2 percent longer-run objective. The core rate rose at a more moderate 2.2 percent year-over-year pace, down 0.1 percent from the prior month.  At week’s end the inflation expectation readings associated with the University of Michigan’s survey of consumer sentiment in March fell slightly from the February survey.
Firm economic data in the Eurozone as elections near
Despite the ongoing steadiness of U.S. equites, the pace of their gains has slowed. So far in March, the S&P 500 is up just 0.6 percent, after gains of 1.8 percent in January and 3.7 percent in February. The pattern in Europe, however, has been quite different. The EuroStoxx 50 index of Eurozone equites declined by 1.8 percent in January before managing a 0.9 percent increase in February – although so far in March the index is higher by 3.9 percent as measured in euros. In dollar terms this month’s increase is 5.2 percent.
Economic data in the Eurozone has been relatively firm of late and inflation has stabilized. Nevertheless, two weeks ago the European Central bank maintained its accommodative policy stance. Last week in the Netherlands, in the first of three closely watched national elections, the populist party fared relatively poorly, boosting investor confidence at least in the short-term. That respite is likely to be short lived, however, as the political focus now shifts to France, where the first round of national elections will take place on April 23. If no candidate wins a majority of the vote, a runoff will take place on May 7. The latest poll shows the populist candidate, Marine Le Pen, surviving the first round, but losing by a two-to-one margin in the runoff. And in the meantime, the UK has said it will invoke Article 50 on March 29, to begin the process of negotiating its departure from the European Union.
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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 Bank of America Merrill Lynch High-Yield Bond Master II Index is an unmanaged index that tracks the performance of below investment grade U.S. dollar-denominated corporate bonds publicly issued in the U.S. domestic market.
The Consumer Price Index is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care. Changes in CPI are used to assess price changes associated with the cost of living.
University of Michigan Consumer Sentiment Survey is a rotating panel survey based on a nationally representative sample that gives each household in the coterminous U.S. an equal probability of being selected. Interviews are conducted throughout the month by telephone. The minimum monthly change required for significance at the 95% level in the Sentiment Index is 4.8 points; for Current and Expectations Index the minimum is 6.0 points.
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. 
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