Clarida comments and employment data push rates higher from recent lows
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.
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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.
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