Brexit Rebound Continues on Central Bank Stimulus Optimism

US stocks are adding to yesterday’s gains while Treasurys are selling off for the second straight day as the initial shock from the Brexit vote appears to be subsiding.  Global equity markets have now recovered about half of their losses amid speculation that central banks will act to spur global growth.  South Korea already announced a fiscal stimulus package and the Bank of Japan and Bank of England appear likely to follow suit.  The Fed has announced it is ready to provide dollar liquidity, and Fed funds traders are currently pricing in a greater probability of a rate cut rather than a rate hike this year.  The market’s view is fluid and certainly not set in stone, but a greater than 50% chance of an increase isn’t currently being priced in until early 2018.  Fed Governor Powell fanned the flame last night when he said the Brexit vote shifted risks for the global economy further to the downside, which may cause central banks to reassess monetary policy.

In terms of new US data releases, a report showed consumer spending increased in May for the second consecutive month off the back of increased demand for automobiles and other goods.  The 0.4% increase was in line with expectations, and followed an upwardly revised 1.1% increase in April.  The increase points to a pickup in second quarter GDP, but it may be short-lived, as the financial turbulence following last week’s Brexit vote could hurt consumer confidence and encourage saving over spending.  Personal income also moderated last month, rising 0.2% after a 0.5% gain in April.  A separate report showed pending home sales fell 3.7% in May, a slightly larger drop than expected. 

All three major US stock indexes are currently up between 1.5% and 2.0%, while Treasury yields and swap rates are 1-2 bps higher across most major maturities.  Both WTI and Brent crude are surging close to 4% after a larger than expected draw down in US inventories.