Volatility returns: Will central banks take action?

In this week’s video update:

• After a relatively flat summer, volatility returns to both U.S. equity and fixed income markets with the 10-Year U.S. Treasury Yield up 15 basis points to 1.7%.
• Potential expectations at next week’s respective U.S. and Japanese central bank meetings.
• What is the overall U.S. economy outlook for the remainder of the year?

On the latest update, Director, Investments Practice, Bindu Sutaria meets with Investment Strategist, North America Paul Eitelman to discuss the week’s market events and what is ahead next week for both the U.S. and Japanese central banks.

Looking first at the U.S. equity and fixed income markets, Eitelman dives into potential causes of recent volatility in both asset classes. He notes one of the likely catalysts is the change in the 10-Year U.S. Treasury yield, up 15 basis points to 1.7% – the highest since leading into the Brexit vote at the end of June. Reflecting equity volatility, the Russell 1000® sold off about 2.5% this week relative to the middle of last week.

In what might be driving this volatility, expected central bank meetings next week or the repricing of risk premiums in the U.S. market, Eitelman acknowledges that the repricing of risk premiums are the likely cause of U.S. volatility. However this repricing is also starting to be seen globally due to market concerns about central bank activity, as markets seem to have been disappointed by the European Central Bank’s (ECB) lack of action on September 8. Looking to next week’s Bank of Japan meeting, markets appear to be factoring in the unclear potential actions there, which may include moving rates or further asset purchases.

On the topic of central banks, Eitelman also notes that while he still expects the U.S. Federal Reserve (Fed) to not raise rates next week, he expects it to be a “hawkish hold” and the Fed will likely use the opportunity to strongly indicate that a rate hike in December is most likely.

Reminding investors that both the U.S. and Japanese central banks seem to be data dependent in their decision making, Eitelman moves to U.S. retail sales data this week, which was the lowest since March 2016 and fell by a tenth on a sequential basis. However, the larger picture of consumer spending has been stronger overall for the third quarter and remains a healthy pace to track to 3% for the year.

Overall, Eitelman sees the U.S. economy chugging along in its mediocrity of performance for the near term. Russell Investments’ outlook for U.S. economy still expects about 2% growth for 2016. Learn more about our Global Market Outlook for the U.S. and other regions in the next quarterly update coming out in early October.