What to expect from the markets this week, June 19, 2017

Market “Near Term” Snap Shot (To see this week’s slides, click on download button at the bottom of this article.

Fed Very Serious About Tightening

During the Federal Reserve Chair Janet Yellen’s press conference on June 14, following the Federal Reserve’s Open Market Committee meeting, two key points were made in her opening comments.:

First, the Federal Open Market Committee raised the target range for the federal funds rate by .25 percentage point to 1 to 1.25 percent.

Second, the committee released additional information on the process that they will follow in normalizing the size of their balance sheet. Once the Fed starts normalizing their balance sheet, expect longer duration loan interest rates to rise.

The Fed’s economic justification

Economic growth appears to have rebounded from the slowdown experienced in the first quarter.

Household spending appears to now be supported by solid fundamentals with ongoing improvement in the job market and elevated levels of consumer sentiment and wealth.

Last year’s weak business investment, is now expanding.

2017 exports are showing improved strength in 2017 which is a function of an expansion of global growth, due, in large part, to extremely accommodative global Central Bank policies.

Rate Hike What You Need to Know

Short of just monetizing future debt the Fed desperately needs to raise rates in preparation for the next economic U.S. downturn or the next U.S. recession, which could be sooner rather than later.

The Fed raised the Fed Funds Rate by .25-percent and indicated their intention to raise rates one more time this year (likely December) and three more times next year. This is totally data dependent. Of the potential next four rate increases the December rate increase is most likely. 

Without what many refer to as the Trump Rally or the anticipation of expanding fiscal, trade and regulatory policy and other global policy simulative activities which energized U.S. and many global equity markets post November 2016 U.S. elections the Fed would have been limited in their ability to tighten or raise rates this time. 

The present impact of the rate increase on the U.S. Treasury Yield is to compress the yield curve by raising, for example, the two-year yield while the 10-year yield continues to weaken with lower yields or interest rates. Stated differently the short end of the yield curve is rising and the long-end is falling. The reason the long end of the yield curve or, for example, the 10-year Treasury Yield is falling, in part, is due to declining inflation expectations and foreign demand remains strong for this product. Assuming the Fed reaches the point of starting the process of normalizing their balance sheet, then the long end of the yield curve should start rising.

What will raise the long end of the curve?

The Fed gave a blue print for slowly unwinding their balance sheet, which is another form of tightening.

Assuming the Fed reaches the point of starting the process of normalizing (shrinking) their balance sheet then the long end of the yield curve should start rising as the Fed removes liquidity from the market. This suggests all who have longer term debt should reconsider the merits of refinancing.

Two out of four major Global Central Banks are tightening, the U.S. Federal Reserve and the Bank of China. The European Central Bank and the Bank of Japan are still highly accommodative and manage aggressive Quantitative Easing Programs.

Market participants have building global growth expectations in the second half of the year. The question becomes is the growth sustainable without major complimentary fiscal, trade and regulatory policy simulative intervention by Global Governments and Central Banks.         

Bloomberg 2 Minute Video by Brian Kartagener: Fed Chair Janet Yellen's Press Conference in Two Minutes, June 14, 2017

Federal Reserve officials forged ahead with an interest-rate increase, raising the benchmark lending rate for a third time in six months. Fed Chair Janet Yellen held a press conference after the decision. Here are the highlights.

The Fed Chair said the median projection for the federal funds rate is 1.4 percent at the end of 2017 year, 2.1 percent at the end of 2018, and 2.9 percent at the end of 2019. 

“As always, the economic outlook is highly uncertain, and participants will adjust their assessments of the appropriate path for the federal funds rate in response to changes to their economic outlooks and views of the risks to their outlooks. As I’ve noted previously, policy is not on a pre-set course.”

FOMC issues addendum to the Policy Normalization Principles and Plans, Monetary Policy, 06/14/2017

Federal Reserve Board and Federal Open Market Committee release economic projections from the June 13-14 FOMC meeting, Monetary Policy, 6/14/2017

Federal Reserve issues FOMC statement, Monetary Policy, 6/14/2017

In addition to the following “Expanded near Term Market Considerations Week Beginning June 19, 2017”

This Week’s Select Summary Considerations:

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