Market Digest – Week Ending 6/17
Equities continued their downward trajectory which started on Thursday of last week. Over that time, US and foreign stocks have sold off more than 2% and 6%, respectively. This heightened anxiety has been driven by multiple factors, including a lack of action from the Bank of Japan, increased cautiousness from the US Fed, and concerns over Britain’s possible departure from the EU. It has simultaneously fueled a flight to safety, pushing bond yields lower and gold prices higher.
S&P 500: 2,071 (-0.9%)
FTSE All-World ex-US: (-1.2%)
US 10 Year Treasury Yield: 1.61% (-0.03%)
Gold: $1,298 (+2.0%)
USD/EUR: $1.128 (+0.3%)
• Monday – Microsoft announced it is buying LinkedIn for $26.2 billion.
• Tuesday – Domestic retail sales came in stronger than expected, increasing 0.5% in May from the prior month.
• Wednesday – The Federal Reserve left interest rates unchanged while simultaneously lowering its forward outlook for increases.
• Thursday – US inflation firmed with help from higher gasoline prices. Both broad and core measures of CPI were up 0.2% in the month of May.
• Friday – Iraqi forces successfully retook a government facility in Fallujah in a battle with ISIS that has lasted weeks.
• Friday – Russia’s track and field athletes were banned from this summer’s Olympic Games in Rio de Janeiro due to charges of widespread doping.
On Wednesday the Federal Reserve left interest rates unchanged, which was widely expected. What wasn’t expected was its new level of cautiousness. Just weeks before Chairwoman Janet Yellen hinted that a June or July hike was very possible. But now, the median projection of 17 officials is 0.875% by year end, which is much lower than the original 1.375% forecast they gave in December of last year. Moreover, the longer term forecasts continue to move lower with the fed-funds rate now expected at only 2.375% by the end of 2018.
One of the primary themes from Yellen’s comments was uncertainty. Uncertainty surrounding economic growth, uncertainty surrounding China, and even uncertainty around next week’s Brexit vote. The Fed is doing its best to provide guideposts on its future plans, and many investors hang on nearly every word they speak. But the reality, as evidenced by their constantly changing forecasts, is they simply don’t know what will happen. Economic growth remains modest, and it is difficult to find any catalyst that would cause it to rapidly accelerate—at least to a level that would warrant an aggressive rate hike policy. And there are still plenty of potential downside risks.
So as we’ve said before, the interest rate path moving forward will likely be a slow and gradual one.