Three of the world’s most influential central banks met last week—the Federal Reserve (Fed), the European Central Bank (ECB), and the Bank of Japan (BOJ)—during an action-packed five days that also included several important economic data updates. The BOJ meeting was a nonevent, as expected, but the Fed and ECB gave investors some minor surprises; though the Fed’s hawkish tilt versus the ECB’s dovish tile sent yields on their respective sovereign debt in opposite directions, as shown in the LPL Chart of the Day:
Takeaways from the Fed meeting, which we discussed in a blog post shortly after it concluded, leaned hawkish but provided little in the way of headlines; however, a closer look at the dot plot is warranted for two main reasons. First, given that market expectations prior to the meeting suggested traders were undecided as to whether we’d see three or four hikes this year, the move in the median dot from three to four swayed the market’s expectations; however, the shift was relatively modest as a result of the second reason: investors are aware that the median dot plot is simply that, a median. A change in opinion of just one Federal Open Market Committee member could change the widely reported median, meaningfully altering media headlines without too much change in the underlying conviction of the group. This is exactly what happened, so investors who understood what’s going on “under the hood” of the dot plots didn’t overreact to the headline.
On the other side of the Atlantic, the ECB announced that it would end its bond purchases (so-called quantitative easing) by year end, but ECB Chief Mario Draghi pledged to not raise interest rates until at least summer 2019 and hold the benchmark target rate at zero as long as is necessary thereafter. Major regional indexes took the news in stride, but traders will no doubt be looking for clarity in the weeks ahead.
One of the most impactful weeks for the markets year to date—as far as central banks are concerned—was met with little more than a shrug from investors. However, according to LPL Research Chief Investment Strategist John Lynch, “The muted reaction indicates that markets were prepared for the announcements, largely due to the heavy telegraphing and communication from central banks, which have grown weary of surprising investors.” For more insights and analysis of the recent central bank meetings, please read this week’s Bond Market Perspectives.
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