Podcast: June 2010 Federal Open Market Committee Meeting
30 June 2010 by Sean P. Simko
Length: 00:03:35
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SEI Global Fixed Income Management manages fixed-income strategies for SEI’s Managed Account Program (MAP) and Integrated Managed Account Program (IMAP).
Welcome, my name is Sean Simko. I am Managing Director of SEI Global Fixed Income Management. Today’s commentary will focus on the June 23 meeting of the Federal Open Market Committee, or FOMC, including the release of the Committee’s statement and the market’s initial reaction.
The FOMC concluded its scheduled two-day closed-door meeting on Wednesday and as expected, the Committee left the lending rate unchanged, holding it in the range of 0 to 25 basis points. With the labor market still healing and the economic recovery still developing, there is no reason for the Committee to risk credibility or risk capping economic growth by making major shifts in policy too early. The Committee provided a statement that was similar to its last one with only minor changes. The overall tone of the statement was modestly more cautious. Comments such as the “economic recovery is proceeding” and the “housing market remains at a depressed level” reflect the change in tone from the last statement. The Committee also responded to the woes from Europe addressing the stability or instability of the banking sector by saying “financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad.”
Inflation continued to trend lower as commodities and energy prices recently declined. The Committee has stated all along that its view is for inflation to remain contained and to trend lower. There is nothing in the latest statement that indicates a shift in its view. Kansas City Fed President Thomas Hoenig was once again the sole dissenter, disagreeing with the “extended period” language for the fourth consecutive meeting.
Prior to the Fed’s statement, the market showed characteristics similar to what we have seen lately, with volatility driven not by speculation around the Fed and its statement but largely by economic data points. New-home starts fell off the cliff, dropping 32.7% month-over-month in May. This was significantly worse than the market was expecting. As one would expect the Treasury market rallied on this data to levels not welcomed by investors who wanted to take part in the 5-year auction which, as one would expect, performed poorly, with the bond needing to be priced 7 basis points cheaper in yield for the auction to successfully take place. The auction was a catalyst for the market to reverse course and sell off, which once again reversed its course after the FOMC released its statement.
The 2-year/10-year curve rallied in parallel fashion throughout the day, continuing the move after the statement. The curve shifted lower by approximately 4 basis points, with the 5-year ending the day at 1.92% and the 10-year at 3.12%. We continue to feel that these levels remain unattractive. We feel the market looked at the statement as a non-event. The 10-year continued its move higher, touching 3.77% after the release.
We continue to feel that the Fed will hold at these abnormally low rates for the foreseeable future with the earliest tightening to occur in the first quarter of 2011. Where applicable, our portfolios remain positioned to take advantage of this view as rates are likely to remain range-bound with a modest upward bias. We maintain the view that the economy is stabilizing, although cautious due to global developments, the housing market and labor market. The question at hand is the sustainability and strength of growth, which only time will tell.
If you have any questions regarding this podcast or the markets, please contact your SEI representative.
Welcome, my name is Sean Simko. I am Managing Director of SEI Global Fixed Income Management. Today’s commentary will focus on the June 23 meeting of the Federal Open Market Committee, or FOMC, including the release of the Committee’s statement and the market’s initial reaction.
The FOMC concluded its scheduled two-day closed-door meeting on Wednesday and as expected, the Committee left the lending rate unchanged, holding it in the range of 0 to 25 basis points. With the labor market still healing and the economic recovery still developing, there is no reason for the Committee to risk credibility or risk capping economic growth by making major shifts in policy too early. The Committee provided a statement that was similar to its last one with only minor changes. The overall tone of the statement was modestly more cautious. Comments such as the “economic recovery is proceeding” and the “housing market remains at a depressed level” reflect the change in tone from the last statement. The Committee also responded to the woes from Europe addressing the stability or instability of the banking sector by saying “financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad.”
Inflation continued to trend lower as commodities and energy prices recently declined. The Committee has stated all along that its view is for inflation to remain contained and to trend lower. There is nothing in the latest statement that indicates a shift in its view. Kansas City Fed President Thomas Hoenig was once again the sole dissenter, disagreeing with the “extended period” language for the fourth consecutive meeting.
Prior to the Fed’s statement, the market showed characteristics similar to what we have seen lately, with volatility driven not by speculation around the Fed and its statement but largely by economic data points. New-home starts fell off the cliff, dropping 32.7% month-over-month in May. This was significantly worse than the market was expecting. As one would expect the Treasury market rallied on this data to levels not welcomed by investors who wanted to take part in the 5-year auction which, as one would expect, performed poorly, with the bond needing to be priced 7 basis points cheaper in yield for the auction to successfully take place. The auction was a catalyst for the market to reverse course and sell off, which once again reversed its course after the FOMC released its statement.
The 2-year/10-year curve rallied in parallel fashion throughout the day, continuing the move after the statement. The curve shifted lower by approximately 4 basis points, with the 5-year ending the day at 1.92% and the 10-year at 3.12%. We continue to feel that these levels remain unattractive. We feel the market looked at the statement as a non-event. The 10-year continued its move higher, touching 3.77% after the release.
We continue to feel that the Fed will hold at these abnormally low rates for the foreseeable future with the earliest tightening to occur in the first quarter of 2011. Where applicable, our portfolios remain positioned to take advantage of this view as rates are likely to remain range-bound with a modest upward bias. We maintain the view that the economy is stabilizing, although cautious due to global developments, the housing market and labor market. The question at hand is the sustainability and strength of growth, which only time will tell.
If you have any questions regarding this podcast or the markets, please contact your SEI representative.
This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice. This information is for educational purposes only.
There are risks involved with investing, including loss of principal. No mention of particular securities should be construed as a recommendation or considered an offer to sell or a solicitation to buy any securities.
SEI Investments Management Corporation or its employees may sometimes hold positions in the securities discussed here.
SEI Global Fixed Income Management is a unit of SEI Investments Management Corp,. which serves as the investment advisor.
There are risks involved with investing, including loss of principal. No mention of particular securities should be construed as a recommendation or considered an offer to sell or a solicitation to buy any securities.
SEI Investments Management Corporation or its employees may sometimes hold positions in the securities discussed here.
SEI Global Fixed Income Management is a unit of SEI Investments Management Corp,. which serves as the investment advisor.