Once again the markets have demonstrated what they care about the most: the Fed and how aggressive it may be on interest rates, and any threat to the Trump agenda.
Midday, the Fed's William Dudley told a luncheon crowd that the Fed may begin the process of shrinking its $4.5 trillion bond portfolio later this year and that there might be only a "little pause" in the Fed's rate hike plan.
That was viewed as mildly hawkish by the markets. The dollar and 10-year yields rose. Bank stocks rose modestly, as did the S&P, though the gains have not lasted. This is not surprising, since Dudley's comments mostly affirm what had come out of the Fed minutes, though the "little pause" comment is slightly more hawkish.
Contrast this to the past 24 hours, where we've had a series of high-drama events that haven't done much to move the markets for even a short period. We have had a high-stakes meeting between President Trump and President Xi of China, a Syrian missile strike, and a disappointing jobs report.
And the market reaction? The S&P 500 is flat.
True, the 10-year yield has had a rather wild 24-hour run, going from 2.34% last night, then down to 2.29% on the Syrian missile strike, then rallying back early in the morning to 2.33%, then plunging to 2.27% right after the disappointing jobs report (the lowest level since mid-November) — and now rallying back to 2.36% on the Dudley comments.
But all this is small potatoes compared to what happened Wednesday, when the Dow plunged 200 points after the Fed said they would be moving to reduce their balance sheet later this year and House speaker Paul Ryan said tax reform could take longer than health-care reform.
The bottom line: geopolitical risk is definitely back on the radar of stock traders, but other factors are much higher up on the risk list. The Trump agenda and the Fed are the two top risks, with — for the moment — the economy and geopolitical risk much further down.