Waiting for the Next Catalyst
The markets have been mostly range bound over the past week, as the risk rally that emerged following the surprise Brexit vote appears to be awaiting the next catalyst. Since we believe that most of the better tone is due to accommodative central bank expectations, the current cycle of CB meetings provides some of the most important data points for investors to ponder for the remainder of the summer. Neither the ECB nor BOE chose to make changes during their convocations over the past few weeks, a nod to the shrinking set of policy tools at their disposal. The fairly well behaved markets over the past few weeks have brought the bankers time to be more contemplative, although we think that this period of calm will be limited given investors’ significant expectations. The Fed meeting today was also relatively benign, although we think the Fed would prefer to keep each meeting a “live” meeting. There was little change in the statement, with an expected acknowledgment of an improvement in the June employment report after the horrendous May report. Having said that, the average is probably the correct way at looking at employment, and the statement that there has been “some” improvement in labor utilization strikes us as a correct middle ground. The odds of a rate hike assigned by the futures market were little changed after the meeting, with 25% odds in September and 45% odds in December. There was nothing in the FOMC statement that caused us to rethink our rate hike expectations, which does not expect an increase in 2016, with risk focused on a possible December move.