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Newfleet Market Review & Outlook
The environment remained favorable for fixed income markets, especially spread sectors, in the third quarter. Heightened tensions over North Korea, political turmoil in the Trump White House, and weather disasters such as Hurricane Harvey challenged the positive tone and introduced modest volatility, but did not alter the market’s upward trajectory. The Federal Reserve put off a third rate hike in September but announced the start of its balance sheet reduction plan. The U.S. dollar drifted lower over the quarter, oil prices rebounded from recent bear market levels, and signs of synchronization in global growth and major central bank policy emerged.
August marked the 10th anniversary of the onset of the Global Financial Crisis. Now, a decade later, the OECD (Organization for Economic Development) has reported that all 45 countries in its universe are on course to register growth this year. Several of the major developed market central banks also are moving into line with plans to end quantitative easing. While the Fed prepares to unwind its balance sheet, the European Central Bank (ECB) is set to announce details of its tapering in October. The ECB’s stance reflects confidence in the euro zone’s recovery alongside a dominance of pro-Europe leadership, even as the re-election victory of German chancellor Angela Merkel was dampened by a surge in support for a far-right party. The Bank of England left rates unchanged in September but hinted at future hikes to restrain Brexit-related accelerating inflation.
As expected, the Fed left its benchmark rate at a range of 1% to 1.25% at both its July and September FOMC meetings. The likelihood of a December hike jumped to over 75%, however, the Fed stated that an additional hike remains data dependent. Of historic significance at September’s meeting, the Fed announced that it will start to implement its long-anticipated balance sheet reduction plan in October. Cautious to avoid any negative impacts on the economy, the Fed also signaled a slower pace of overall tightening than previously projected.
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