As we move towards the close of a week that’s seen quite a few drivers come into markets, it’s time for traders to start trying to look around-the-corner to see which themes may be driving price action in the week ahead. Next week’s economic docket is relatively light. The highlight for macro themes will likely be the FOMC Meeting Minutes from the Fed’s February meeting to be released on Wednesday. Below, we dive into U.S. equities and the U.S. Dollar.

U.S. Stocks: To Infinity and Beyond?

U.S. Stock prices have continued to run-higher, even with the build of risk factors in the macro backdrop. S&P futures have moved-up by a whopping 16.2% from the lows of election night, and so far in 2017 are up by 5%. And while U.S. Stock prices are still at historically ‘expensive’ levels, the net-impact of this week’s two-day Humphrey-Hawkins testimony was even-higher stock prices; so the one major risk factor to continued gains in equities prices – a higher probability of faster rate hikes from the Fed – does not appear to be a limiting factor at the moment.

As for drivers? This is likely quite a bit of hope with a good deal of excitement. A lot of that hope seems to be pinned towards political factors and the prospect of a massive tax cut plan in the United States along with the hope for increased infrastructure spending and growth programs down-the-road. This is likely one of the reasons why so much of the financial media has become fixated on the Twitter account of President Trump, and it does bring up what is looking to be an interesting tango in the months ahead.

Given next week’s expectedly quiet backdrop, this would be a good opportunity to gauge market sentiment around this theme. If we do see a pullback in U.S. equity prices next week, this can open the door to a buying opportunity. If we don’t – then fears of ‘exuberance’ and markets getting ahead of themselves should denominate a quiet stance in such venues.

(Click on image to enlarge)

Chart prepared by James Stanley

Is the Dollar Going to Pick a Direction?

U.S. Dollar price action has been rather chaotic this week. What started out as another post-Election rally, with an out-sized reversal starting on the night of the election, the U.S. Dollar faced considerable selling throughout the month of January. But the reasons for bullish trend remained very much alive, as there are/were simply few other economies looking at tighter rate policy options in the near-term.

So, as we opened the door to February, that bullish up-trend began to show again; and this week’s events gave that theme some additional fire-power, at least at first. At day one of Chair Yellen’s testimony, she began her prepared remarks by indicating that rate hikes should come sooner rather than later, and she offered an upbeat assessment on the U.S. economy.

The following morning, CPI was released out of the United States with a .6% print for January, twice the expectation of .3%, and this further contributed to the Dollar’s gains as the Greenback temporarily traded above a key resistance level at 101.53. But that was short-lived: As Yellen began day two of her testimony, selling took over in the Greenback and has been present pretty much ever since. The main point of contention appears to be around a possible hike in March. On Tuesday (day one of her testimony) odds for a March hike shot-up very quickly as she spoke to Congress. But on day two of that testimony, odds began to drop and haven’t yet revived.

The likely driver here will probably come from Fedspeak, at least if this mirrors similar behavior as the past. This is very similar to what we saw in August of last year with Yellen and Stanley Fischer both pledged to near-term rate hikes at the Jackson Hole Economic Symposium. The immediate impact was Dollar strength as traders feared a possible move in September; but as we actually moved nearer to that September meeting the logic of hiking rates just ahead of a pivotal Presidential Election dictated that it probably wouldn’t happen. In that instance – the Dollar didn’t begin to re-strengthen until after the Fed’s September meeting.

June seems like a much likely candidate for that next rate move from the Fed, and this appears to be what markets are gearing up for. But any indications of a potential March move – any mentions of ‘three hikes in 2017’ could re-trigger Dollar strength, at least in the near-term, as markets brace for the slightly-increased probability of a move at the Fed’s meeting next month.

(Click on image to enlarge)