This week’s news flow has been busy with Central banks’ meetings: Fed, Bank of Japan, Bank of England. All three institutions kept their monetary policy unchanged.
- Janet Yellen, Fed’s Chairman, had once again a very dovish stance, repeating “we don’t know” on numerous topics including US macroeconomic outlooks. Not much to make rate hike expectations go up! Markets now think there is a 38% probability of a hike by the end of 2016, compared to 75% at the beginning of the month. On top of that, Fed’s neutral long term rate was revised down -50 bps to 3%. Keep in mind previous revisions in September 2015 and in June 2014 were only -25 bps. Therefore, the 10Y US yield reached a new low since 2012.
- The Bank of Japan stayed put as well and did not boost its QE purchases. While economists’ expectations of a new easing were low, market reaction was once again brutal (Nikkei -6%, JPY +2.6% new low since 2014).
- The Bank of England kept its rate unchanged as widely expected and issued a warning about the consequences of a Brexit.
Overall, fixed income core markets look very expensive to us in terms of Inflation Breakevens or real rates.
This week, some Chinese data came out in line with consensus but more importantly, MSCI put off local Chinese equities inclusion into its index. Oddly enough, Chinese indices did not slump. We must admit however that they are already deep under water YTD.
La Française’s Essentiel Markets brings you an insightful analysis of the latest financial news by François Rimeu, Head of Total Return at La Française Asset Management.