Stimulus Bets and US Growth Optimism Boost Risk Assets

We are opening the week with a better tone to risk assets off the back of central bank stimulus optimism and renewed confidence in the strength of the US economy.  The Bank of England and European Central Bank have already announced that they are prepared to unveil additional stimulus measures if necessary, and Japanese Prime Minister Shinzo Abe’s resounding victory in Japan’s upper house election over the weekend set the stage for a new fiscal stimulus package from the BoJ.  In what was viewed as a referendum on Abe’s economic stimulus policy known as “Abenomics”, Abe’s coalition gained a two-thirds majority of the 121-seat upper house, indicating strong support from the Japanese people.  The Japanese stock market reacted favorably as the Nikkei rallied over 4%, its largest jump since February. 

Without any significant US data releases today, some of the positive momentum from Friday’s robust June payrolls report carried over.  The Wall Street Journal’s Jon Hilsenrath wrote that the upbeat report isn’t likely to change the Fed’s near term outlook, but that it increased the odds of a rate hike as soon as September.  Hilsenrath believes the Fed will remain in wait-and-see mode until then, in order to make sure the economy is stable after a volatile first half, and that markets have steadied in the aftermath of Britain’s vote to leave the EU.  Market participants appear less convinced that a September hike is on the table, as Fed funds imply less than even odds of a hike until at least the end of 2017.

All three major US stock indexes are currently up between 0.50% and 0.75%, while Treasury yields and swap rates are 5-8 bps higher across all major maturities.