One Down, the Big One To Go
Markets have been awaiting two big events – The outcome of the Federal Reserve’s June Open Market Committee Meeting on June 15 and the Brexit vote on June 23.
Federal Reserve Rate Hike Decision
The June FOMC meeting was highly anticipated because all during the month of May a stream of Fed officials insisted that a rate hike was ‘on the table’ in June and that ‘June was a live meeting’. Market participants began to anticipate that a rate hike coming out of the Fed’s June or July meeting was probable. That expectation was reduced to nearly zero on June 3rd when the U.S. Department of Labor Statistics indicated that only 28,000 jobs were created in May.
On Wednesday, as expected, the Federal Reserve announced that they had maintained the Fed Funds rate at the target range of 1/4 to 1/2%. The Dollar Index* immediately fell as hints for further rate hikes were muted. Indeed, while the Fed officials’ median projection for rates hikes in 2016 remained at two, the number of Fed officials projecting just one rate hike in 2016, increased from one to six from their previous forecasting round in March.
Gold and silver had been rising the past five trading sessions, rose further on the Fed announcement. Gold ended last week at $1273 an ounce and rose to nearly $1300 on the Fed announcement. Silver closed last week at $17.28 and shot up to $17.57 immediately after the Fed announcement.
Janet Yellen Press Conference
Fed Chair Janet Yellen held an hour long press conference after the Fed announcement and struck a cautious tone. Ms. Yellen’s stated often that in general she believed the economy, labor market and target inflation rate were all headed in the right direction but that recent economic reports had given her and the Fed Committee pause as to the timing of the next rate hike. She also mentioned that any Fed decision to raise rates would be based on incoming data that while she expected such data to be good, would also consider incoming data that did not match the Fed’s expectations in their rate hike deliberations.
Ms. Yellen noted that the Fed did not want to overreact to the poor April and May jobs reports as she and the Committee expected the labor market to continue to improve in the coming years, not withstanding recent weakness. As a result of the mixed economic reading, Ms. Yellen expects a gradual increase in interest rates, albeit slower than thought earlier in the year.
Ms Yellen noted during the press conference that the Fed may have to lower rates to zero in the event of a future shock and that it wasn’t ‘impossible’ that the Fed might raise rates in July. In response to a question about ‘helicopter money’ Ms. Yellen did not rule it out but said in normal times it wouldn’t make sense to do, but that in an unusual situation it might be warranted.
Brexit was neither mentioned in the Fed’s statement announcing the interest rate decision nor in Ms. Yellen’s opening statement at her press conference. Ms. Yellen addressed Brexit in response to a question during the press conference and said that it was something that the Committee discussed and “was fair to say was one of the factors” in not raising rates at the June meeting. Ms. Yellen noted that a Brexit leave vote could have ‘consequences in financial markets and impact U.S. economic outlook and the appropriate path of [monetary] policy.’
The British Pound
The British pound has been gyrating like an emerging markets currency rather than a stable first world currency ever since the possibility that Great Britain might leave the European Union arose. Polls over the last two weeks have shifted in favor of the leave vote, driving the pound down. A ‘stay’ vote could reward those long the pound handsomely. A ‘leave’ vote on the 23rd may cause the pound further losses and/or a period of continued wild swings.
Year to Date Dollar Index, Oil and Gold Prices
The big event next week is the Brexit vote on June 23. There are no planned reports that will be anything close to the significance of the Brexit vote.
Here are some reports that could impact currency movements next week IF any of the reports are wildly out of line with market expectations:
Jun 22 MBA Mortgage Index 06/18
Jun 22 FHFA Housing Price Index Apr
Jun 22 Existing Home Sales May
Jun 22 Crude Inventories 06/18
Jun 23 Initial Claims 06/18
Jun 23 Continuing Claims 06/11
Jun 23 New Home Sales May
Jun 23 Natural Gas Inventories 06/18
Jun 24 Durable Orders May
Jun 24 Durable Orders ex-trans May –
Jun 24 Michigan Sentiment Jun
*The US Dollar Index tracks the US dollar vs. the Euro, the Japanese Yen, the British Pound, the Canadian Dollar, the Swedish Krona and the Swiss Franc. The Euro comprises nearly 58% of the index.
This article by BGASC is not, and should not be regarded as, investment advice or as a recommendation regarding any particular course of action.