When Yellen Speaks, the World Listen


by Timothy D. Carkin, CAIA, CMT Senior Vice President

Stocks finished the week off by only 0.80 percent, recovering some of the losses suffered Thursday after the Fed voted to keep interest rates unchanged. Similarly, the Bank of Japan and Bank of England are also maintaining their monetary positioning. Attempting to escape uncertainty about the vote in Britain next week regarding the possible “Brexit,” the bond market pushed the 10-year rate to an intraday low of 1.52 percent, a low we have not seen since 2012. Along those lines, the U.S. dollar weakened relative to the Japanese yen and British pound, finishing the week at 104 and 0.79, respectively.  The market sell-off was tempered by small bits of positive economic news. The NAHB housing market index rose 2 points, the CEO economic outlook ticked up and the May CPI number was up 0.2 percent. Lastly, initial jobless claims, increasing by 13,000, were unremarkable.

The FOMC minutes released this week recognized that, “pace of improvement in the labor market has slowed while growth in economic activity appears to have picked up.” Yellen’s acceptance of “the new normal,” a term she has previously shied away from, signals the Fed’s path to normalize rates has slowed. The vote to keep rates steady this week was unanimous, but the Fed’s dot plot has six officials signaling one rate increase in 2016, a much more dovish position.

Also of concern to the FOMC was the “Brexit” referendum vote which will be held June 23. Campaigning is on hold for the moment but recent polls have seen a sharp rise in the “Leave” camp. Morgan Stanley estimates the FSTE 100 could drop as much as 16 percent from current levels if the “Leave” vote is victorious. Equity mutual funds in the United Kingdom saw $1.1 billion in outflow last week, the second largest draw in a decade. While we think the “Brexit” is unlikely, investors across the world are flocking to safety to wait out the volatility stemming from the vote.

Our Takeaways for the Week:

  • The Fed continues to reduce its rate hike expectations
  • Investors across the world are anxious to see “Brexit” behind them