Daily Market Color June 19, 2019Fed Holds Rates Unchanged, Leaves Door Open for Future Cuts Jeff Davenport FOMC leaves rates unchanged, but Fed statement and Powell press conference set stage for July rate cut. The market largely expected a shift in tone, namely the removal of the word “patient” from the FOMC’s statement. That said, the Fed’s comments today signaled an even more dovish stance than the market expected, citing rising “uncertainties” and adding that the Fed would “act as appropriate to sustain the expansion”. Markets also got an updated “Dot Plot” today which shows the median interest rate forecast of Fed officials into the future. While the Dot Plot shows a shift lower in the Fed’s projected interest rates in 2020, the Fed’s median interest rate projection still remains well behind the market for 2019. For a word by word comparison of the FOMC’s last two statements, please click here. Treasury yields and swap rates fall across the curve after FOMC meeting. The bond market rallied on expectations that the Fed will ease monetary policy this year as yields on the 10 year Treasury note fell to almost 2.00%. Yields and swap rates on the short end of the curve fell as much as 10 basis points while rates on the long end declined a more modest 3 bps. The significant steepening was apparent in the 10’s – 2’s yield spread which climbed to 28 basis points–the highest level so far this year. Fed Funds futurse now imply a 100% probability of a 25 bp cut a the next FOMC meeting on July 31st. US equities continue to cheer prospect of rate cuts. The S&P 500 and the Dow Jones rose 0.30% and 0.15% respectively, continuing to bounce back after a dreary May that was marked mostly by trade conflicts. Trade may return to the forefront of the news cycle next week as the Presidents Trump and Xi meet at the G20 summit. Underscoring the risk-on shift in markets, the VIX or “Fear Index” has further retreated to 14.33 after peaking near 20 last month. Financial Accounting Standards Board Begins Debate on Transition to SOFR. The FASB began discussion today on issuing an Exposure Draft to the accounting rules for contracts impacted by moving from LIBOR to SOFR. Their intent is to specify which modifications can be made without triggering a contract extinguishment but rather a continuation of the existing contract. This project, “Reference Rate Reform: Facilitation of the Effects of the Interbank Offered Rate Transition on Financial Reporting” will be addressed in a future Exposure Draft. No decisions were made today. However, the Board did agree that the Exposure draft would not specifically identify which contracts or indices will be covered by the new guidance, but rather they will employ a principles-based approach toward determining those contracts that may be impacted by the LIBOR transition. Similarly, the Exposure Draft will not specify which provisions in the contract could be modified, but instead it will require that the modified provisions be essential to or related to the transition. The good news is that FASB has proactively moved to address the transition to SOFR issues and that while continuing to monitor developments, they are focused on providing sensible relief.