Market Insights

September 26, 2016

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Prior Week Summary

Fans of American history may recall that exactly 56 years ago today the first televised U.S. Presidential debate, between Kennedy and Nixon, took place in downtown Chicago. As the market works through the potential implications of the recent announcements from the Bank of Japan and the FOMC last week, it is likely that domestic markets will begin to focus more heavily on the outcome of the upcoming U.S. Presidential election, beginning with tonight’s debates, for clues on longer term market direction.

The Fed has, once again, used its forward guidance to set the stage for the next rate hike, while simultaneously lowering its longer run projection for Fed Funds. The FOMC’s latest summary of economic projections walked the committee’s median expectation for the Fed Funds rate at the end of 2017 and 2018 lower by 50 basis points, while lowering their longer run expectation for the terminal Fed Funds rate below 3%.

The committee judged that “the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives.” Notably, three members of the committee dissented from the majority, causing this vote to carry the largest split since December 2014. It was also noteworthy that the “dot plot” suggests that one of the committee members expects the current level of Fed Funds to persist for the next 3-years.

In similar fashion, the Bank of Japan took their quantitative easing program to new heights by implementing a “yield curve control” initiative designed to steepen the government bond yield curve. As of this writing, the announcement has had the opposite impact as the Japanese yield curve has flattened further.

The Look Forward

In addition to reading the tea leaves of the first U.S. Presidential debate tonight, the market will be busy with an active data calendar as well. Updated information is expected on the housing market, PCE inflation, and the manufacturing sector in addition to a full dance card of Fed speakers throughout the week.

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