Here’s What We’re Thinking – June 1, 2016

Investment Strategy: Improvement in U.S. data allows Fed to get more hawkish; Markets seem prepared for a summer rate hike, but beware volatility as key dates approach

June 2, 2016

Equities:  In recent weeks, the U.S. Federal Reserve has tacked decidedly toward another interest rate hike (see below). Global equity markets have so far reacted calmly. So long as equity markets remain docile and U.S. economic data continues to rebound from a Q1 slump, there appears to be a greater than 50% probability that the Fed will raise interest rates by another 25bps by the end of July. As we’ve witnessed recently, two months is a long time in the global macro context, making a rate hike far from certain. Purely from a rate hike perspective, the near-term outlook for Canadian and U.S. equities is modest at best. A Fed rate hike, and prospects for another one in December, is sure to sustain upward pressure on the U.S. dollar, which should weigh on commodity prices (specifically gold) and also continue to restrain corporate profits of U.S. multinationals. Read More…