Markets Struggle for Direction As Brexit Volatility Subsides

US stocks are fluctuating close to record highs while Treasurys are rallying marginally across the curve in a slight retracement move as investors look for new drivers to provide the market’s near term direction.  Volatility has died down in recent days as markets continue to grow more comfortable with the consequences of Brexit.  Both Cleveland Fed President Mester and St. Louis Fed President Bullard said yesterday that financial markets have acted in an orderly manner following Britain’s unexpected decision to leave the EU, but they had a different take on the degree of impact on the US economy.  Bullard said he expects the impact will be “close to zero”, while Mester warned that a lasting appreciation of the US dollar, as a result of pressure on the pound, could negatively impact US exports.  The IMF characterized the potential impact on the US economy as “negligible”, and kept unchanged its previous growth forecasts of 2.2% for 2016 and 2.5% for 2017, issued one day prior to the British referendum.
 
In terms of new US data releases, a report showed import prices rose 0.2% in June due to a rebound in oil prices, but still fell below the consensus forecast of 0.5%.  Import prices have now risen for four consecutive months, but outside of fuel, prices for all other goods fell 0.3% last month, the largest decline since December.  The Fed will also publish its Beige Book this afternoon, which may provide additional insight on the post-Brexit reaction of US firms and consumers. 

Aside from the data, there was a $12 billion 30-year government bond auction today and a variety of Fed speakers including Dallas Fed President Kaplan (hawk, non-voter) and Philadelphia Fed President Harker (hawk, non-voter).  All three major US stock indexes are trading close to unchanged vs. yesterday’s close, while Treasury yields and swap rates are 3-7 bps lower across all major maturities.  Oil prices reversed yesterday’s gains with both WTI and Brent crude trading down nearly 4.5%.