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Brexit vote takes away our uncertainty

The historical Brexit vote has thrown global financial markets into disarray, to say the least. The vote of 52 percent to 48 percent was a shock felt around the world. Global stock markets plunged in value, gold rose to a two-year high, oil prices tumbled, the pound fell to a 31-year low and all thoughts of an interest rate increase in the U.S. have evaporated. Britain’s exit from the European Union is expected to take two years, which will only drag out the pain of uncertainty. The unprecedented move has already generated questions about which of the remaining EU countries will be the next to try an exit strategy.

It is difficult for any economist to predict how the exit will play out internationally, but one thing is certain – there will be a greater degree of cautiousness from central banks, especially the Federal Reserve. European economic weakness has always been a concern for our central bank when it came time to evaluate U.S. economic stability. With the uncertainty of how the British exit will affect the U.S, economy, the Federal Reserve will certainly take a step back and keep interest rates low for quite some time. The fed funds future market is only putting a 14 percent chance on the next rate increase happening in December. More startling are the new bets for a rate decrease – there is now a 12 percent chance that the Fed may lower rates in September. A decrease is far-fetched, but it is an indication of how unsettled the future of interest rates is.

Other Key Indicators this Week:

Durable Goods – Orders for goods meant to last over three years fell 2.2 percent in May, much more than expected. The core rate, which is a measure minus defense and aircraft, was down 0.7 percent. This was the fifth decline out of the past seven months. Much of the weakness was due to smaller than expected airplane orders. Even without that volatile component, the overall orders report reflects continued weakness in equipment investment.

Housing – Data for existing and new home sales in May was mixed. Sales of new homes declined 6.0 percent following a revised lower increase in April. Existing home sales, on the other hand, increased 1.8 percent to the highest annualized level in nine years. Prices continue to rise for all homes as inventory tightens. The price of a new home rose 1.0 percent, while existing home prices gained 4.7 percent from a year ago. Price affordability continues to weaken, even in this low rate environment.

Strategically for Credit Unions:

This week’s Brexit vote put the nail in the coffin for an increase in interest rates. With the uncertainty about interest rate levels removed, credit unions should find it easier to set deposit and loan rates going forward. For credit unions facing liquidity issues, this is a good time to consider longer-term borrowing or adding non-member deposits. Agency bond holders should prepare for a resurgence of call notices.

Note: Treasury and Agency yields on the weekly Numbers report are as of close on June 23. Bond yields fell 15 to 20 basis points across the curve overnight. The two-year Treasury note is 0.63 percent and the 10-year note is 1.56 percent at the time of this writing.

Note: Due to the Fourth of July holiday weekend, the next issue of Behind the Numbers will be July 8, 2016.

Sarina Freedland – Senior Investment Officer

Although this information has been obtained from sources we believe to be reliable, we do not guarantee its accuracy, and it may be incomplete or condensed. This is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. All herein listed securities are subject to availability and change in price. Past performance is not indicative of future results. Changes in any assumption may have a material effect on projected results.

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