Prior Week Summary
The domestic bond rally came to grinding to a halt last week as better than expected data and increased visibility out of the U.K. reduced the relative demand for haven assets. The US 10yr Treasury saw a rise of almost 23 basis points since last Friday’s close, as the 2s10 spread widened 13 basis points to 0.89% over the same period. The Bank of England, held overnight lending rates at 50 basis points, but the panel indicated that, “most members of the committee expect monetary policy to be loosened in August,” electing to wait for additional post-referendum data before making a decision. The Bank of England’s indication of stimulus along with similar sentiments from both the Bank of Japan and the ECB and strong US economic data, helped the S&P 500 and Dow Jones to record highs over the week, as investors began to move capital from safe-haven assets to riskier alternatives. Fed Fund Futures are now indicating a 40% chance for a December rate hike, up from 28% just a week earlier.
A number of Fed officials spoke on the state of the economy and monetary policy over the week. Notably, James Bullard, President of the St. Louis Federal Reserve Bank, downplayed the effect of Brexit on the US economy describing the impact as “close to zero.” Additionally, Bullard warned that the June non-farm payroll report is the exception rather than the rule, and that market participants should expect sub 200k payroll gains given the current position in the business cycle. Fed Official Lockhart highlighted the need for a gradual rise in lending rates stating, “I can envision for a number of years a lower potential growth rate… That means the appropriate interest rate remains in a low range.”
The Look Forward
A relatively light week for economic data this week, with updated info on the housing market taking center stage in an otherwise quiet week. On the duration calendar, $13b expected in 10-yr TIPS and a 2-yr auction later in the week.