by Connor Darrell
CFA, Assistant Vice President – Head of Investments
Markets capped off one of the strongest Januarys on record with another positive week, bolstered by a change in rhetoric from Fed Chairman Jerome Powell (discussed further below). The bond market reacted positively to the Fed communication as well, with the 10-year treasury yield dropping to its lowest level in weeks. Internationally, the focus remains on the uncertainty surrounding the continued Brexit negotiations. British Prime Minister Theresa May has indicated that she would like to reopen the discussions which were finalized in November, but EU representatives have stated that the terms that were reached are legally binding. Currency markets have been most impacted by the continued back and forth, but it is likely that equity market gains have been held back as well.
A Change in Tone
Last week, the Federal Reserve held interest rates at current levels and took a significantly more dovish tone in its communications. For markets, words like “patient” and “wait-and-see” represented a refreshing contrast from terms like “auto-pilot,” which was used in recent months when discussing the future path of monetary policy. It also seems apparent from the Fed’s communications that the change in tone had less to do with a shift in its view on the U.S. economy (which remains quite favorable) and more to do with the confluence of risks that have permeated in the global economy. From our perspective, it is also highly likely that the volatility in equity markets was a key influencing factor, even if it were not explicitly communicated during post-meeting comments.