“There is only one thing in life worse than being talked about, and that is not being talked about.” - Oscar Wilde
As much as our investment strategy group would like to stop talking about the situation in Greece, it still garners some of our attention. Alexis Tsipras seems to be taking Oscar Wilde to heart, wanting us to continue talking about him and Greece when in fact it should have little to do with our thoughts on investment positioning. Much like a car accident in the other lane on the highway, we cannot seem to look away. Even though we know we should keep our eyes on our side of the road and focus on our driving, we cannot help but look at the wreck. And even though these events have been well-telegraphed and no one should be surprised as the wreck transpires, markets are still reacting. Concerns about Greece and the potential knock-on effects of a Grexit have moved peripheral spreads wider and German 10-year yields lower. There was an EU leaders’ special meeting on Greece on Monday, June 22, and Greece has a €1.6-billion payment due to the IMF on June 30. Per European Central Bank (ECB) President Mario Draghi, the ECB has “enough instruments” to deal with any contagion, including bond buying through quantitative easing (QE) and the outright monetary transactions (OMT) program. We shall see, and no doubt we shall keep talking about the Greeks over the summer.
Markets are reacting to the standoff in Greece, and it has led to some risk aversion. Coupled with heavy issuance calendars in the corporate bond, CMBS and high-yield bond sectors, this has moved fixed income risk asset spreads wider. So far in June, excess returns for these sectors are negative for the month at -0.38% for corporate bonds, -0.11% for CMBS, and -0.46% for high-yield bonds.
In the US, economic data continued to show improvement. Data released in the penultimate week of June 2015 included upbeat readings in consumer confidence, initial jobless claims falling to 267,000, and a stronger report on building permits at a 1.275-million annualized pace (see exhibit 1 below). That positive data countered slightly weaker readings on housing starts and consumer prices.
The Federal Open Market Committee (FOMC) met on 16-17 June 2015, and while the Committee acknowledged the recent improvement in the US economic outlook after a sluggish start to the year, the tone of its communication remained dovish. While there was a modest downgrade to its economic view, the forward guidance of the “dots” once again caught the market’s attention. Committee members expecting less than two rate hikes in 2015 moved up to seven from three. Additionally, the dots reflected a downward expectation in projected policy rates of 25 basis points for both the end of 2016 and 2017.
FOMC Chair Janet Yellen’s comments were also somewhat dovish, focusing again on the data-dependent nature of Federal Reserve (Fed) policy and the idea that rate hikes will be gradual and not at the “measured pace” of the last tightening cycle, that is, 17 consecutive hikes of 25 basis points. The committee remains cautious in their approach to tightening in order to ensure the recovery is sustainable.
Equity markets moved higher and US 10-year yields moved lower following the FOMC statement, and the dovish tone could see the rate hike lift-off slipping from September to December. The market’s expectation for the path of the policy rate has been below the Fed’s dots, and at least for now, the FOMC is adjusting toward the market.
Exhibit 1: US building permits
Source: Bloomberg, as of June 19, 2015