Prior Week Summary
The curve continued to flatten for much of last week, as traders marked time in anticipation of the “Brexit” vote. The world’s central bankers have weighed in and currency volatility has increased to multi-year highs as each new poll on the referendum is digested by the market. It is reasonable to expect a heightened level of potential volatility in all markets this week, especially if a “leave” vote increases in probability. Like all events with this level of market significance, the details will define the magnitude of the market reaction in the intermediate term, while market positioning and trading flows will drive markets over the short-term.
As the possibility of a “leave” vote gained momentum last week, the yield of the 10-yr German Bund fell below zero, as the global flight-to-quality also helped drive the 10-yr U.S. Treasury note to an intraday low of 1.52%. In addition, the FOMC, Bank of Japan, and Bank of England all met last week, each deciding to hold overnight lending rates at current levels. For the first time since January of this year, the FOMC was unanimous in its decision to hold the Federal funds target range steady, citing concerns over jobs growth and the UK referendum. The central bank’s median projection for the federal funds rate at year-end held steady at 87.5 basis points, which suggests two rate hikes over the remaining four FOMC meetings. Of the 17 Fed officials, the number of officials expecting only one rate hike this year rose from one to six.
The Look Forward
Data releases will carry less than average market significance this week, as the focus of the financial markets will be squarely on the outcome of the U.K. referendum which takes place on Thursday. Fed Chair Yellen is scheduled to address the House and Senate for her semi-annual update to Congress this week, but few surprises are expected.