A rise in US interest rates this month was all but confirmed by Federal Reserve chairwoman Janet Yellen over the weekend, but what lies ahead over the rest of the year for rates could prove a fresh hurdle for the four-month rally in global equity markets.
In a speech in Chicago, Dr Yellen signalled as clearly as she could that Fed policymakers would vote to lift the US central bank's key rate at the end of their March 14-15 gathering, capping off a seemingly co-ordinated push from the central bank to lift market expectations of official tightening.
"At our meeting later this month, the committee will evaluate whether employment and inflation are continuing to evolve in line with our expectations, in which case a further adjustment of the federal funds rate would likely be appropriate," she said at a business luncheon. "The process of scaling back accommodation likely will not be as slow as it was in 2015 and 2016," she said.
Market pricing of a March increase, which had already spiked sharply during the week on a slew of hawkish comments by Fed governors William Dudley, Lael Brainard and Jerome Powell, implied a 94 per cent probability the Fed will tighten next week, up from just 45 per cent at the end of the previous week.
While it's now seen as all but certain that the Fed will move this month, there is some downside risk, mainly from the closely followed US employment data, due on Friday.
"Barring unusually low employment growth among the data released [this] week, it seems that FOMC participants have 'boxed themselves into a corner' by losing the option of not raising rates in March," said Citigroup economist William Lee. "There may be significant potential for market disruption if they do not raise rates."
Wall Street traded in a narrow range on Friday, with all three benchmarks inching up on the day, closing near recent record highs. ASX futures are pointing to a 0.4 per cent rise at the local start of trade, following sharp drops on Friday.
Is the rally starting to run dry?
Banks, which see their profit margins improve with higher rates, have paced global markets higher, even on the ASX, reflecting a cautiously optimistic Reserve Bank. The RBA is expected to hold its key rate at 1.5 per cent when it meets on Tuesday.
As a result, the gap between US and Australian rates is about to widen, likely renewing the greenback's appreciation and checking the Australian dollar. The $A recouped some recent losses over the weekend, almost retaking the US76¢ mark.
The Fed in December signalled the prospect of three rate increases in 2017. Citi's Mr Lee sees one this month and a second in September. He's sceptical of a third move given the likelihood that US President Donald Trump's plans for tax reform and spending "big" on infrastructure might be delayed until 2018.
Echoing those doubts, while US two-year yields shot higher last week, the US 10-year yield is up a mere 2 basis points at 2.48 per cent, still well below the December levels and hardly indicating a surge in inflation.
Capital Economics' John Higgins said he was sticking to his forecast that the recent euphoria on Wall Street would fade in the months ahead, and the S&P; 500 will end the year lower than its current level.