Clarida comments and employment data push rates higher from recent lows
- August 9, 2021
Corporates | Kennett Square, PA
Comments interpreted as hawkish by Fed vice chair Clarida, coupled with strong employment data last week, combined to push Treasury yields higher, both on the short and long end of the curve; the dollar followed by strengthening as well, though Delta variant concerns linger.
The Fed and the labor market
As the backdrop of a week that included numerous labor market data releases, the prevailing question in the market has been whether the Fed would see “further substantial progress” toward full employment, key phrasing viewed as a prerequisite for tapering of Fed asset purchases. The data did not disappoint; non-farm payrolls rose a strong 943k for the month of July, marking the largest monthly swing since August 2020. June data was revised upward by a further 88k. Meanwhile, the unemployment rate fell from 5.9% to 5.4%, beating expectations.
Preceding the data release, a speech from Federal Reserve Vice Chair Richard Clarida intimated that rate hikes could happen in early 2023 (prior comments had not indicated when during 2023) and that the Fed would examine tapering in “coming meetings." The market interpreted the subtleties in these comments as hawkish, suggesting rate hikes and tapering could happen potentially earlier than expected. Rates on the short-end of the curve inched up on the rate hike expectation, with 2-year swap rates climbing 3 basis points to 0.21%. Of note, that rate remains below the spike seen following the Fed’s June meeting. On the long-end of the curve, the 10-year climbed 11 basis points to roughly 1.29%. As seen in the chart above, the steep climb comes in context of the 10-year having fallen roughly 40 basis points from its YTD peak in April.
While the Fed has deemphasized recent inflation data in favor of a focus on employment, the market reaction has driven rates up in the short-term; still, all eyes will be on the Fed’s Jackson Hole symposium later this month where they are expected to provide further details on future monetary policy.
Subscribe to receive our market insights and webinar invites
Dollar strengthens while oil prices remain subdued
Concurrent with the employment data, the dollar spiked against many global currencies; EUR-USD fell to 1.17, nearing its YTD lows seen in late March. Meanwhile, oil prices slid this week, falling from $76 to $70 per barrel, a reminder that despite the improving labor market and a cautiously optimistic Fed, demand-related concerns surrounding the COVID delta variant remain a powerful market force.
(Related insight: Read "Six key steps to implementing an operational FX program")
After yields fell over the past few months, many corporates revisited the idea of pre-issuance hedging to lock in future yields. This week’s uptick in rates could accelerate those considerations. As a separate matter, if the curve continues to steepen, the economics of swapping fixed rate debt to floating could prove advantageous for companies.
Concerned about managing interest rate, foreign currency, or commodity risk?
Talk to a Chatham hedging or hedge accounting advisor.
Chatham Hedging Advisors, LLC (CHA) is a subsidiary of Chatham Financial Corp. and provides hedge advisory, accounting and execution services related to swap transactions in the United States. CHA is registered with the Commodity Futures Trading Commission (CFTC) as a commodity trading advisor and is a member of the National Futures Association (NFA); however, neither the CFTC nor the NFA have passed upon the merits of participating in any advisory services offered by CHA. For further information, please visit chathamfinancial.com/legal-notices.
Transactions in over-the-counter derivatives (or “swaps”) have significant risks, including, but not limited to, substantial risk of loss. You should consult your own business, legal, tax and accounting advisers with respect to proposed swap transaction and you should refrain from entering into any swap transaction unless you have fully understood the terms and risks of the transaction, including the extent of your potential risk of loss. This material has been prepared by a sales or trading employee or agent of Chatham Hedging Advisors and could be deemed a solicitation for entering into a derivatives transaction. This material is not a research report prepared by Chatham Hedging Advisors. If you are not an experienced user of the derivatives markets, capable of making independent trading decisions, then you should not rely solely on this communication in making trading decisions. All rights reserved.21-0215
Our featured insights
Treasury yields climb as Fed holds rates steady
The Fed holds short-term rates steady but indicates at least one rate hike in 2022 as U.S. economic recovery continues.
Inflation plateaus as commodities continue upward climb
August CPI data showed inflation declining slightly from its June 2021 peak, while in energy markets recent supply shocks continue to drive prices higher. Interest rates remain range bound as next week’s FOMC meeting approaches.
FX and commodities volatility continue despite continued reopenings
As global economies struggle with natural disasters and the surging COVID-19 delta variant, economic indicators are painting mixed stories about recovery. U.S. initial jobless claims hit a pandemic low, while the dollar’s strengthening trend may be wavering in response to a more bullish stance...
August nonfarm payrolls highlight week of mixed data
As the market continued to react to Federal Reserve Chair Powell’s remarks at the Jackson Hole Economic Symposium, August nonfarm payrolls grabbed headlines after falling short of expectations. Elsewhere, data came in mixed as the delta variant continues to weigh on increased demand.
4 questions to ask when evaluating treasury technology platforms
Treasury teams increasingly rely on technology platforms to automate routine tasks, improve accuracy, and inform strategic decisions surrounding working capital, liquidity, and financial risk management. With an ever-growing ecosystem of technology platforms available to treasury and accounting...
Dovish sentiment prevails at Jackson Hole
The Jackson Hole Economic Symposium took place last Thursday and Friday under the backdrop of an improving employment environment but with continuing concerns about the spread of the Delta variant. Fed Chair Powell’s dovish comments led to a softening of the dollar and slight drop in rates...
Rates drop as market reacts to Fed taper discussions and Delta variant concerns
Minutes from the Federal Reserve July policy meeting showed talk of reducing bond purchases by the end of 2021. The COVID Delta variant continues to drive concern, with the Biden administration officially recommending booster shots for fully vaccinated individuals.