SoFi Blog

Monetary Policy and the Phillips Curve: Global edition.

We’ve seen a moderate increase in stock price volatility this June and early July as comments by European Central Bank president Mario Draghi about rolling back stimulus sent interest rates higher and equities lower globally. More recently, mixed data and comments by Federal Reserve Chair Janet Yellen sent U.S. interest rates back down slightly. A lot has happened in the markets, but looking at events in terms of how central bankers view the relationship between unemployment and inflation can help us make sense of this activity and what may happen going forward.

U.S. stocks are strong; developed world stocks are rallying, but still uncertain; and despite some investors’ fears, emerging markets are still appealing. Here’s what’s been happening in the market over the past few weeks.

A victory for the centrist Emmanuel Macron in the first round of the French Presidential Election sent equities, interest rates, and the dollar higher this week. Polls are forecasting an easy victory in the second round for Mr. Macron over nationalist politician and Eurosceptic Marine Le Pen. The result was a welcome development for the so-called “reflation trade” after political uncertainty on both sides of the Atlantic and some disappointing data spurred a bond rally while equities languished. We continue to like our allocation of globally diversified equities, a short duration bias in fixed income, and exposure to emerging markets.

Last week we changed our portfolio allocations, increasing exposure to emerging markets and foreign exchange as well as taking broader fixed income exposure. But first we’ll cover the economy. A huge miss on the jobs report and recent threats of military escalation in the Far and Middle East sent bond yields lower while the dollar continued to depreciate against many of the world’s currencies. The disconnect continues between so-called “soft” survey data and the more traditional economic statistics. However, optimism remains elevated even as more traditional measures of economic activity indicated subpar growth in the first quarter.

Equities have stumbled over the past several days and interest rates have fallen alongside the dollar. The main impetus for the move was a failed attempt by the new administration and Republican members of the House of Representatives to repeal and replace the Affordable Care Act, or Obamacare.