Markets Take Central Bank Announcements in Stride

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.



The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. The economic forecasts set forth in this material may not develop as predicted.

All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. All performance referenced is historical and is no guarantee of future results.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.

Investing in specialty market and sectors carries additional risks such as economic, political, or regulatory developments that may affect many or all issuers in that sector.

This research material has been prepared by LPL Financial LLC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.

The investment products sold through LPL Financial are not insured deposits and are not FDIC/NCUA insured.  These products are not Bank/Credit Union obligations and are not endorsed, recommended or guaranteed by any Bank/Credit Union or any government agency.  The value of the investment may fluctuate, the return on the investment is not guaranteed, and loss of principal is possible.


For Public Use — Tracking # 1-742267 (Exp. 06/19)