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Market Update

Consumer confidence, spending, and inflation all on the rise

Date:
April 4, 2022

Summary

A busy week of employment data was highlighted by the Bureau of Labor Statistics (BLS) March nonfarm payrolls and unemployment figures. The U.S. 2s/10s yield curve inverted for the first time since September 2019, while crude oil fell after Biden announced a large release from the nation’s reserve.

Consumer confidence, spending, and inflation are all on the rise

The consumer confidence index increased for the first time this year, rising from 105.7 in February to 107.2 in March. Despite the minor increase in confidence, the index is still at its second-lowest point since February 2021. While the labor market propped up the index, the ongoing Russia-Ukraine war and inflation have consumers worried. Consumers surveyed by the Conference Board predicted that inflation will increase by 7.9% in the next 12 months, marking the highest percentage ever recorded in the survey’s history.

Falling in line with consumers’ prediction of rising inflation, the personal consumption expenditure (PCE) price index rose by 0.6% in February to hit a 6.4% year over year total. The consumer price index (CPI), which hit 7.9% year-over-year earlier this month, is the more popular measure of inflation. However, the PCE price index is the Federal Reserve’s preferred inflation measure. Currently, both indices tell the same story.

Although inflation is on the minds of many, consumer spending increased by 0.2% in February. A potential shift in spending between goods and services is now very possible, as the slight overall increase in February was led by a 0.9% increase in services, while spending on goods dropped by 1.0%. Spending on goods fell in a number of areas, but motor vehicles saw the biggest decrease.

Mixed news on a busy week of employment data

A busy week of employment data was highlighted by the Bureau of Labor Statistics (BLS) March nonfarm payrolls and unemployment figures. Nonfarm payrolls increased by 431,000 this past month, coming in below expectations of a 490,000 jump. The leisure and hospitality sector led payroll increases with a 112,000 gain. The March unemployment rate, expected to come in at 3.7%, totaled 3.6%. The total number of unemployed persons fell by 318,000 to six million.

Employment data releases started on Tuesday when the BLS reported on February job openings and job quits. Job openings totaled 11.3 million in February, down slightly from the first month of the year but still coming in higher than expectations. The education and health services sector led the way in openings with 2.23 million, followed closely by professional and business services (2.09 million) and transportation and utilities (1.86 million). The number of people who quit their jobs in February totaled 4.35 million, up 94,000 from January. The 4.35 million workers who voluntarily left their jobs in February amount to 2.9% of the country’s workforce. The trade, transportation, and utilities sector saw 1.06 million quits, while the leisure and hospitality sector saw 863,000 quits. Hires also increased in February, jumping by 263,000 to reach 6.7 million.

The parade of data continued with the release of the March ADP employment report on Wednesday. The ADP report, which measures nonfarm private sector employment, showed that private payrolls increased by 455,000 in March. Beating expectations slightly (455,000 actual vs. 450,000 expected), March marks the 23rd straight month in which the private sector has seen an increase in jobs. Leisure and hospitality led all sectors in payroll increases.

Yield curve inverts signaling a potential recession to come

The U.S. 2s/10s yield curve inverted for the first time since September 2019 last week. The two-year U.S. Treasury note yield rising above the benchmark 10-year yield is often viewed as a sign of a recession to come in the next two years. However, experts need to see a substantial time of inversion before it becomes a true signal of potential recession. Some market analysts predicted the inversion could reverse if the Russia-Ukraine war is resolved soon. Others do not believe that the curve inversion is as reliable in predicting recessions as it once was due to the amount of quantitative easing that the Federal Reserve has been doing. Corporates continue to have the opportunity to lock in long-term risk for a lower swap rate than they are able to have for medium-term risk.

(Related insight: Register for the webinar, "Pre-issuance Hedging Strategies for Corporates")

Commodities update

In the midst of an extremely volatile week, crude oil dipped back below $100/bbl for the first time since mid-March. On Thursday, President Biden announced the largest release ever from the United States’ oil reserve. From May to October, one million barrels of oil will be released per day. This marks the third time Biden has released oil from the nation’s strategic reserve over the last six months as consumers continue to feel pain at the pump. The President estimated the new release could cause gas prices to fall anywhere between 10 and 35 cents per gallon. During his announcement, Biden also called on U.S. oil companies to drill more in a moment of “consequence and peril for the world.” Elsewhere, Russian President Vladimir Putin continued to push for all Russian commodity exports to require payment in Russian rubles. Two weeks ago, Putin ordered that “unfriendly” nations be charged in rubles for natural gas. As a result of last week’s announcement, that may now be the case for other commodities including oil and metals. Crude oil finished the week back over at $100/bbl.

(Related insight: Read "7 ways to maximize FX and commodity hedging impact while minimizing costs")

The week ahead

A much quieter week lies ahead, although investors will certainly be tuned into the March FOMC meeting minutes that will be released on Wednesday. The Russia-Ukraine war remains at the center of global news and markets.

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Disclaimers

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.

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