Market Insights

July 25, 2016

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Prior Week Summary

Bond yields traded in relatively tight ranges throughout the week, ending the recent bout of heightened market volatility. The IMF cut its global economic growth forecast slightly, largely citing Brexit as its main driver of economic uncertainty and downside risk. The European Central Bank held its first policy meeting since Brexit, electing to hold overnight lending and deposit rates steady until more post-referendum data becomes available. Mario Draghi made clear that the ECB has the “readiness, willingness, and ability” to strengthen stimulus efforts given the need, shrugging off concerns of a lack of quality bonds to purchase saying, “In the past we’ve given enough evidence… of our ability to adapt our purchases to reach 80 billion euros a month until March 2017 or beyond.”

The US received largely positive economic releases this week in the housing sector. New Home Sales beat analyst expectations, adding 1.19 million homes in June. Notably, existing home sales reached its highest level since 2007 helped by the conducive economic environment of increasing job stability and wage growth across the US, as well as, continued low borrowing costs.

The FOMC will hold its July monetary policy meeting on Tuesday and Wednesday, and is widely expected to hold overnight lending rates at current levels. As Brexit concerns fade from the front- burner and US economic data shows positive signs, market participants have updated expectations for the Fed’s next rate hike, pricing in the next rate hike at the March 2017. Only two weeks ago, Fed Fund futures were pointing to a January 2018 meeting for the next hike.

The Look Forward

A relatively active data calendar on tap this week, with a wide ranging series of data releases on tap. The Fed meeting will take center stage, and will likely drive the markets this week. On the duration calendar, the Treasury is expected to auction $26b in 2-yr notes, $34b of 5-yr notes, and $28b of 7-yr notes.

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