Prior Week Summary
The immediate volatility shock associated with the U.K. referendum seemed to work its way through the market last week, while the longer term impacts are yet to become apparent. The flight-to-quality brought U.S. Treasury yields to both recent, and historical, lows last week. The 10-year Note easily fell through its all-time low yield, hitting 1.37% on Friday while the 30-year Bond rests below 2.20% – over 100 basis points below where the FOMC currently envisions the appropriate level of Fed Funds to be at the end of 2018. While the Fed has certainly needed to follow the “market” forecast lower over the course of the last few years, the macro-economic signals being sent from current market pricing appear to be exceedingly bearish when compared to the relatively more sanguine reading of the economy by the Fed’s projections and most private forecasters.
In what could portend further “Brexit” related volatility in financial markets, a large U.K. commercial real-estate investment vehicle halted redemptions in a nearly $4B fund following a surge of liquidation requests. Additionally, the major rating agencies reduced their outlook for the U.K. economy following the vote, stripping it of its AAA rating. The European Union met for the first time without the U.K., and market participants watched for some clarity on the potential implications of the British exit. The Bank of England’s governor, Mark Carney, signaled “some monetary policy easing will likely be needed over the summer” on Thursday. This further strengthened market participant’s views that the FOMC will not be in a position to raise overnight lending rates this year, as money market derivatives are now not pricing in a rate hike until Jan. 2018 meeting, according to Bloomberg calculations.
The Look Forward
A very active week for economic releases upcoming, as the market is expecting updated information on the labor market, the manufacturing sector, as well as the release of the minutes of the June FOMC meeting during this holiday shortened week. The Fed’s Dudley and Tarullo are scheduled to speak early in the week on the state of the economy and monetary policy.