Market Update: Wednesday, May 23, 2018

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Daily Insights

  • Is Turkey a canary in the coal mine? Turkey’s currency, the lira, has lost over 20% versus the dollar since the start of the year and dropped as much as 5% overnight, as market participants’ worries about the state of Turkey’s economy rose. The Central Bank of Turkey wants to raise rates to strengthen the currency and control inflation with authoritarian President Erdogan, who wants rates lowered, having made thinly veiled threats to interfere with Turkish Central Bank’s independence. Concerns have increased over the health of the government’s finances and the potential for rate hikes to trigger a credit event that could lead to risk aversion in other emerging market nations, which can be particularly vulnerable to contagion. That said, markets tend to miscalculate the likelihood of new threats leading to contagion, which we believe is likely the case here.

  • Three points to look for in Fed minutes. Minutes from the Federal Reserve’s (Fed) meeting held earlier this month are due out at 2:00 p.m. ET. As investors parse the details, the focus will be on the inflation discussion and how much consensus there is (or isn’t) to let inflation run above the central bank’s 2% target, as seemed to be signaled in the post-meeting policy statement. Investors will also hope to get clarification on the Fed’s economic outlook after verbiage in previous statements that indicated the outlook has improved were dropped. Last, indications about the group’s intentions for a rate hike when it meets next month will be important, as fed funds futures indicate a hike is all but assured (which the Fed is well aware of).

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