Since, the June 23rd Brexit vote, we have been in a new, even lower interest rate environment. Following the vote, the 10-year immediately dropped to 1.45%, eventually reaching a low of 1.35%, and is now back to 1.45% this morning. Yesterday it was announced that Theresa May would become the new Prime Minister of Great Britain following the resignation of David Cameron. The announcement gave new life to equity markets as uncertainty surrounding the political situation has started to fade somewhat. She is tentatively planning on taking office by Wednesday evening London time.
Even with the recent rally in global stock markets, it still appears as though fixed income markets are content with the current level of rates, and could easily remain in this low environment for quite some time. There have been rumors of potential stimulus programs in other major economies that may help to lift stocks and continue to keep rates low.
The June employment report was strong again. May’s report showed the slowest growth in 6 years, but that was corrected just one month later. Following Brexit, the soonest that we would expect to see a rate increase here in the US is in December, and if the employment reports continue to be strong over the next several months, the chance of that may increase somewhat. The market-implied odds of a Fed rate increase in December dropped from 52% before Brexit, to 10% post-Brexit. That percentage is slightly higher now that markets have had a chance to digest the information.
It is also worth mentioning that at the June Fed meeting, the percentage of Fed officials that expect only 1 rate increase in 2016 grew to 35%. The June meeting rate forecasts now also only call for 3 rate increases in 2017, when previously it had called for 4 increases of a quarter-point each. With rates as low as they are today, and with the expected increase in rates to be gradual, it is not going to pay to try and get or stay short ahead of any rate increase.
Eric Swanson, CFA