ARRC formally recommends SOFR Term Rates
- August 2, 2021
Balance Sheet Risk Management
Financial Institutions | Kennett Square, PA
Prior week summary
In a busy week filled with corporate earnings releases, high-profile economic data updates, and the latest FOMC monetary policy meeting, the major U.S. equity indices and long-term Treasury yields drifted lower to end the month. Economic releases were in plentiful supply last week as market participants received updates to new home sales, the Conference Board Consumer Confidence Index, jobless claims, and most notably, the first estimate of second-quarter GDP. The pace of new home sales unexpectedly fell in June to 676,000 annualized sales, a level not seen since April 2020 as elevated home prices and significant supply constraints lead to slower growth. Consumer confidence is showing resilience in the face of the spreading delta variant and firming inflationary pressures as the Conference Board Consumer Confidence Index unexpectedly increased in July to 129.1. According to the release, participants’ assessment of current conditions improved in July along with an easing in inflation expectations, and more consumers are now looking to purchase big-ticket items in the next six months than one month ago. Jobless claims ticked lower week over week but remain above the pandemic-era lows experienced earlier in July. Lastly, the first estimate of second-quarter GDP indicated that the U.S. economy advanced at a 6.5% annualized rate in the second quarter, the second-highest growth rate since 2003 but well below the 8.4% consensus estimate.
While the economic data for the week garnered some attention, the FOMC’s latest monetary policy meeting and the Senate’s procedural vote on the $1 trillion bipartisan infrastructure bill demanded much of market participants’ attention last week. As expected, the FOMC left both the target range and the pace of monthly asset purchases unchanged, but in a more unexpected move, the committee did establish two standing repurchase agreement facilities designed to alleviate stress and provide liquidity to the financial system should the need arise. While the committee declined to offer a timeline for the eventual tapering of the $120 billion per month asset purchase program, they did indicate, in their view, that “the economy has made progress toward” their goals of maximum employment and price stability but fell short of saying that the U.S. economy has made “substantial further progress” toward those same goals, a key milestone to be reached prior to the launch of the tapering campaign. Speaking at the press conference following the conclusion of the two-day meeting, Federal Reserve Chair Powell hinted at the areas that still need improvement saying, “I’d say we have some ground to cover on the labor market side. I think we’re some way away from having had substantial further progress toward the maximum employment goal.” On Wednesday, lawmakers made substantial further progress on the $1 trillion bipartisan infrastructure bill with a procedural vote on the bill passing 66-28. While the vote was only procedural in nature and the text of the bill has only just been finalized, the result suggests that the proposed bill has a high probability of passing when a formal vote is recorded. Speaking to reporters on Saturday, Senate Majority Leader Chuck Schumer appeared eager to pass the bill in the coming days indicating that, “We may need the weekend, we may vote on several amendments, but with the cooperation of our Republican colleagues, I believe we can finish the bipartisan infrastructure bill in a matter of days.”
After releasing the “conventions and use cases” for “how best to employ the SOFR Term Rates to successfully transition away from U.S. dollar LIBOR” the week prior and the successful launching of the “SOFR First” initiative on Monday, the Alternative Reference Rates Committee (ARRC) formally recommended the CME Group’s Term SOFR Reference Rates on Thursday. In a statement released with the announcement, ARRC Chairman Tom Wipf hailed the committee’s recommendation saying, “This formal recommendation of SOFR Term Rates is an achievement for the USD LIBOR transition specifically and for financial stability overall. This concludes the ARRC’s Paced Transition Plan and market participants now have all the tools they need as we enter the transition’s homestretch.”
The look forward
Market participants are gearing up for a busy week of economic data releases with updated figures on the IHS Markit Manufacturing and Services PMIs, the ISM Manufacturing and Services indices, factory orders, durable goods orders, jobless claims, and most notably, Friday’s release of the July non-farm payroll report.
Market implied policy path (Overnight indexed swap rates)
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