Be patient, time is the key

JUNE FOMC MEETING

Given the recent weakness in payrolls and concerns over financial market volatility surrounding the upcoming Brexit vote, the FOMC left the fed funds target rate unchanged, pointing out potential negative impacts from global economic and financial conditions.

Hence, in order to support continued progress toward maximum employment, price stability and growth, the FOMC opted for unchanged policy at its June meeting, leaving its current rates unchanged at:

• Funds rate upper bound : 0.50 %
• Funds rate lower bound : 0.25 %
• Discount rate : from 1.00 %

The median fed funds rate projection (dot plot) implies continued rate normalization during the second half of this year. The median fed funds projection for year end 2016 remains at 0.875%. However, it was cut by 25bp to 1.625% for year-end 2017 and to 2.375% for year-end 2018. This move highlighted that the Fed has become even more gradual in its hiking plans beyond this year. It seems that the employment report for May has dealt a serious blow to the Fed’s confidence in the ability of the US economy to maintain momentum in the face of global uncertainties.

The FOMC continues to underline that “economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate”.

• Unemployment: The statement underlines that labour markets softened even as economic activity picked up. Strong gains in household spending and further improvement in the housing sector. However, while business fixed investment remained in line with previous months, the Fed noted an improvement in net exports which are placing less drag on growth.
• Inflation: Inflation continues to run below the 2% target and the Fed expects it to remain low in the near term, impacted by low energy and import prices. The Fed indicated its concerns that as some inflation expectation surveys have moved lower, inflation would move back to 2% less quickly than expected.
• GDP: The statement expects the economy to grow above its current potential rate in the second half. As such, after a soft Q1 print, Q2 real GDP growth is tracking around a 2.6% pace. Above-potential economic growth will certainly put further downward pressure on the unemployment rate. The FOMC revised for the second time this year its outlook for 2017 growth at 2% from 2.2% in March.

FOMC members believe they have already met the employment and growth mandate. However, the recent slowdown in payroll growth argues for proceeding cautiously and awaiting fresh data before a new hike. The underperformance on the Fed’s inflation simply reflects the impact of lower commodity prices and a stronger dollar.

MARKET IMPACT

Fed measures

• Main focus for the Fed is to maintain a stronger economy in a sick world (in particular in emerging countries). Thus, the Fed will maintain an accommodative stance as long as is necessary. Meanwhile, the Fed persisted in the view that a series of rate hikes are just around the corner. The statement did not exclude any action at the next FOMC meeting
• These decisions should create volatility generated by uncertainties regarding the timing of the lift-off and concerns over the global economy.

Money Market Investment strategy

This statement confirms that monetary policy is in lift-off mode in the coming months and that the Brexit vote certainly weighed heavily in the balance. Our funds are biased in this direction to outperform our benchmark in such market conditions:

• We maintain a very low rate (40 days) and credit duration (180 days).
• Optimal duration allocation on shorter maturities.
• Favour higher-rated names, that will generate low volatility in our fund