FED STAYING ON MESSAGE – FOR NOW
The markets have consolidated nicely since the start of the month, with last week proving to be one of the strongest for broad risk assets since heightened volatility hit the markets in mid-August. Included in the recent strength is the 5% MTD gain in U.S. equities, 4% increase in oil prices, and 70 bps compression in HY levels. While one would expect a certain degree of consolidation after the volatility over the past few weeks, we would also point out that recently dovish central bank rhetoric has likely added to the improving mood of investors. In particular, we had a universally dovish tone from the BOJ and BOE meetings and Fed and ECB minutes over the past week. While the BOJ restrained itself from another expansion of QQE, recently weak inflation and IP data will make it difficult for the BOJ not to expand its current program. The same can also be applied to the ECB, which also faces inflation concerns and has all but signaled their willingness to keep QE going longer than initially announced (currently 60 billion euro per monthly through Sept, 2016). The central banks most likely to hike in the near term are also facing a similar quandary, with inflation and global growth an evolving concern. Market expectations are now for the BOE to remain on hold into 3Q:16, while odds of a Fed hike have been pushed out to March, 2016 by the futures market, which also happens to be where our thinking has been after the last FOMC meeting.