Keeping an eye on the “quiet” week ahead
- The Federal Reserve responded to very strong economic data by raising interest rates 25bps and lifting the median estimate for future rate levels in 2018 and 2019 very slightly.
- The European Central Bank (ECB) announced a further reduction in the pace of its asset purchase program and predicted the program will terminate altogether at the end of 2018. The ECB also kept rates unchanged and expects to maintain those levels though the summer of 2019 at least. The euro fell against the dollar on the announcement.
- The Bank of Japan (BoJ) kept all policy measures untouched. It continues to purchase Japanese government bonds, maintains its negative-interest rate policy, and seeks to hold the 10-year yield near 0.0%.
A gradual return to normalcy
With BoJ policy unchanged, the Fed announcements in line with expectations, and the ECB policy actions both hawkish (end of QE) and dovish (lengthy commitment to negative interest rates) at the same time, the banks seemed to strike a “middle of the road” posture, and with good reason. Global central banks are unwilling to disturb the balance in their economies, and without runaway inflation, are unlikely to do so. Therefore, gradual moves in policy are likely to be the norm for some time. The Fed tapping the brakes while the ECB slowly lets their foot off the gas is just the next sloth-like step in the normalization of policy.
A quiet week ahead
The Central Banks left markets undisturbed last week, but fresh concerns over a possible trade war and an upcoming OPEC meeting on June 22 may inject some turmoil, despite a lull in planned market events and a lack of key data releases.
Last week, the Trump administration officially re-announced a 25% tariff will be imposed on $50 billion on imported goods. China immediately retaliated with an equivalent list of their own, inciting the threat of further “tit for tat” action from the Trump administration. The drama continues.
Regardless of whether driven by protectionism, monetary policy, or some other factor, the presence of volatility doesn’t diminish our belief in the prospects for small-cap stocks here in the United States. Smaller companies are more leveraged to the domestic economy than are their larger multi-national peers, and as such, they are better positioned for growth amidst U.S. economic strength, risks of a trade war, or a stronger dollar.
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