May Performance – Marching to its Own Drummer
Many of the concerns expressed by the investors came to fruition during May, with the Fed showing its claws to a market that had thought it had undergone an onychectomy. As a result, the odds of a June hike have risen over the past few weeks, although they presently stand below 20% after peaking out at over 35% last week. The expectations for a July or September hike have been similarly volatile, with Yellen’s comments last week being interpreted as hawkish and indicative that either June or July were in play. For our part, we will stick with our September call, but acknowledge that the risk of a July move has increased while pointing to the art of guessing the Fed’s move and the general irrelevance of July vs. September in the grand scheme of rates that remain near their historic lows. June does not fit into our thinking at the moment, mainly because data remains mixed in our assessment, with the strength of the 2Q:16 rebound still in flux and employment and inflation data unlikely to need an aggressive response in the next few weeks. Other data has also been mixed, with strong housing and an improving consumer offset by still weak manufacturing data. The employment report this week will be influenced by the Verizon strike, which may continue to cloud the data for another month, leading us to take June off the table. Additionally, a June hike so close to the Brexit vote may introduce unnecessary volatility to the market. Having said that, the bar seems to have been lowered for the FOMC, which had sounded much more hawkish through the first quarter.