The Federal Reserve place significant weight on labour market data and it looks likely that they will begin to tighten monetary policy around mid-year. Treasury bond markets have sold off in anticipation of the first US interest rate rise since 2004.
Usually, equity markets can deal with the first few Fed hikes in a cycle, since these usually come on the back of better economic news.
This time around may be different, since rates have been so low for so long, and many people now working in markets will have had no experience of a more hawkish Fed. For us, the issue is not so much when the first hike will come, if at all, but how quickly rates rise.
Given very low levels of US inflation and with other major central banks continuing to ease policy, we expect only a few hikes from the Fed, so loose monetary policy should continue to provide a supportive backdrop for equity markets.
