In a fell swoop by increasing its discount rate and with ramifications still to unfold, the Federal Reserve has re-asserted its leadership not only as regulator with respect to private finance but also internationally. Its timing provides maximum flexibility ahead of March 16, a date both of the next FOMC and the finance deadline for Greece from the European Union. The Fed and other central banks still need to provide cover for the politically difficult task of addressing deficits despite stubborn unemployment and the drive for growth. The upcoming Fed Semi-annual Monetary Policy report should be noteworthy. In markets re-adjusting from massive quantitative ease, we expect yields to rise across upward sloping curves globally until neutrality is established with as benchmark, the 10 year U.S. T Notes approaching 5% in yield. Capital markets are likely to monitor developments like fixed income yield curve pivots more closely than is generally recognized.
Our theme extends into focus on credit quality within fixed income, with our favor still for the short to mid maturity portion. In equities, it extends into little potential for valuation expansion and more favor for situations able to deliver both dividends (financial strength) and growth (operational strength), available in portions of information technology, healthcare and integrated energy. On risk, we do see as positive the recovery of the U.S. dollar, now to 1.35/Euro and likely to continue with little consternation from the Federal Reserve or other central banks. Separately, we see gold as a hedge against general, not just dollar, uncertainty in an era of large deficits.