Prior Week Summary
Following the relatively weak May employment report, the rates markets have continued to grind lower in yield, led by strength on the long-end. The curve flattening has intensified as of late, with the spread between 2 and 10-yr Treasury notes trading at roughly 90 basis points, the narrowest spread in nearly 9 years. In a speech on Monday, Chairwoman Yellen indicated that despite the weak signals being sent by the labor markets, the committee still considers July to be a live meeting, subject to the uncertainties relating to the UK referendum. The Chairwoman noted that news from the “labor markets over the past year have been generally good and there are tentative signs of faster wage growth, and that one should never attach too much significance to any single monthly report.” The Committee’s assessment continues to be at odds with market driven variables, which are currently indicating that traders see less than a 50% probability for a hike for the remainder of this year.
Across the pond, the European Central Bank has indicated that it will continue to act aggressively and use all of the tools at its disposal in the attempt to spur economic growth. To that end, the central bank has begun to purchase speculative grade corporate bonds in its quantitative easing programs. To qualify, the debt only needs to be given an investment grade rating by one of the ratings agencies and highlights the difficulty that central banks may have as they continue to push the limits of unconventional monetary policy.
The Look Forward
There is a relatively active data calendar this week, with updated data upcoming on retail sales, wholesale prices, industrial production, consumer prices, as well as the meeting of the FOMC on Wednesday. As of this writing, the Fed Funds futures market is placing 98% odds for no change on Wednesday.