For the week ending June 21
No Longer Patient
On December 19 of last year, the Federal Reserve (Fed) raised rates and foreshadowed additional gradual increases in 2019. Then, just weeks later, the Fed seemingly backed away from any near-term rate increases at its January 2019 FOMC meeting. The statement issued after the January meeting said the Fed would be “patient” with respect to future interest rate adjustments. This patient language was included in the statements for the FOMC meetings that concluded in March and May 2019.
Against this backdrop, for the week just ended, the central event occurred at 2 p.m. on Wednesday when the Fed released its official statement for the meeting that had just concluded. The FOMC statement dropped the word “patient,” indicating uncertainties had increased and that the Committee “will act as appropriate to sustain the expansion.” Investors translated that as a clear signal that rate cuts will arrive shortly—something the futures market has been anticipating for some time.
This is detailed in the chart above, which shows the historical Fed Funds rate midpoint (solid line), along with the outlook from FOMC members and financial markets. The orange dots detail the median of FOMC expectations – the so-called dot plots – and demonstrate the likelihood of at least one rate cut. Fed Funds Futures (the gray dots), however, clearly display that the financial markets are anticipating multiple rate cuts in the coming months. The Fed next meets in late July and futures currently show the probability of a rate cut at that time as a certainty.
Monetary stimulus also looks to be forthcoming from Europe. On Tuesday, European Central Bank (ECB) President Mario Draghi hinted as much at a forum in Portugal. He said that if the economic situation deteriorated over the near-term the bank would announce further stimulus “commensurate to the severity of the risk.”
Monetary Policy Narrative Propels Stocks Higher
The S&P 500 rallied strongly for the week just ended, closing at an all-time high on Thursday, before pulling back slightly on Friday. For the week as a whole, the Index was higher by +2.22%, bringing its gain for the year-to-date to +18.87%. With one week to go, the Index has registered a gain for the month of June of +7.34% which, if it holds, will be the best showing for June since 1955, according to the Wall Street Journal.
International equities also rallied last week. Developed international markets, as measured by the MSCI EAFE Index, kept pace with the S&P 500 Index by advancing +2.22%. Emerging markets (MSCI EM Index) rallied sharply, rising +3.83% for the five-day period.
Yields on U.S. Treasury securities, which have declined meaningfully since December 31, 2018, ended the week with modest gains (lower yields). The benchmark 10-year note closed out Friday (June 21, 2019) yielding 2.05%, compared to 2.08% at the prior week’s close. The extent of the decline in yields is evidenced by the fact that the 10-year Treasury started the year at 2.68%.
With the ongoing trade issues and escalating tariffs creating economic headwinds around the globe, investors will be focused on Japan late this week. The G20 will be meeting in Osaka and President Trump has indicated that he will have an extended meeting with Chinese President Xi. Since the trade standoff with China started, any updates as to a likely resolution or, conversely, ongoing escalation, have had an outsized impact on the financial markets. We are confident that will be the case again late this week when updates arrive after President Trump’s meeting with President Xi.