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The Weekly Economic & Market Recap    

June 15, 2018  

Investors had several interesting and pertinent news items to digest this week. The Federal Reserve raised their benchmark rate another quarter of a percentage point, as expected, but the forward rate projections suggest a slightly more hawkish tilt. Fed officials expect an additional two hikes this year and three more next year. If these anticipated rate increases come to fruition, the fed funds target would increase to 3.0% to 3.25% by the end of 2019 and will probably exceed the neutral interest rate. The neutral interest rate is the rate that is neither stimulative or restrictive regarding policy. The more hawkish tone caused the treasury yield curve to flatten as the 2-year to 10-year treasury spread hit a cycle low of 35 basis points. The European Central Bank also met this week and announced their intention to phase out its QE program by the end of the year. The ECB also indicated that they would not consider raising rates until the summer of 2019 which financial markets interpreted as dovish. But from a broader perspective, markets are beginning to take notice of the growing divergence in central bank policy. The one-year Treasury bill has climbed from 1.97% to 2.31% over the last three months, and the U.S. dollar has appreciated 6.3%. Emerging market sovereign debt has been especially hard hit this year as much of their debt payments are dollar denominated. As economic growth paths and the pace of central bank policy normalization diverge, asset class correlations will as well.

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