Continued recovery spurred on by key data
Corporates | Kennett Square, PA
Persistent Fed policy, optimistic economic data, and the ongoing recovery from the COVID-19 pandemic buoyed investors about the U.S. economic recovery. Worldwide recovery from the pandemic causes the U.S. dollar to weaken. Commodity prices hit multi-year highs as supply outweighs demand. President Biden’s mid-week speech lays the groundwork for an expansive infrastructure plan.
Continued economic recovery and a stay-the-course mentality from the Fed were the dominant market themes this week. U.S. yields started higher than the previous week and continued their ascension through Friday. The FOMC met on Wednesday and said it would keep its benchmark short-term rate near zero, where it has remained since the pandemic started over a year ago. The goal is to help keep borrowing rates down for individuals and businesses to encourage spending. The Fed also said it would continue buying $120 billion in bonds each month to keep longer-term borrowing rates low. With no changes to policy, rate hikes, or any proposed tapering of bond purchases, the market viewed the Fed’s statement as optimistic about the future of the U.S. economy. Market reaction to the meeting was positive, with investors happy for both the continuance of the low-rate environment in the near term and the Fed’s corroboration of the view that the economy is recovering well.
Key economic data was also released this week. First quarter GDP results of 6.4% were slightly below expectations but still carried a positive view from the market. Jobless claims this week were at 553,000, which continues the steady decline in claims over the past few weeks. Employment cost index (ECI), Personal Income, and Consumer Spending metrics all outperformed their median forecasts.
The CDC came out with new guidelines regarding individuals who are fully vaccinated. Fully vaccinated individuals can now gather indoors with other fully vaccinated people without masks, conduct activities outdoors without wearing a mask, and travel within the United States without additional testing or quarantining. Regarding the increased number of Americans being vaccinated, Federal Reserve Chairman Powell stated, “That’s really what has been moving markets a lot in the past few months, this turn away from what was a pretty dark winter to now a much faster vaccination process and a faster reopening, so that’s part of what is going on.”
The rise in long-term rates, along with positive economic indicators and optimism around recovery, has many of corporate clients evaluating strategies previously tabled due to uncertainty. This includes pre-issuance hedging for future debt, refreshed interest expense analysis, and even exploration of fixed-to-floating hedges for those waiting for a steeper yield curve.
(Related insight: Watch the on-demand webinar, "Pre-issuance Hedging: Practitioners Share Insights on Why and How")
The U.S. dollar continued to weaken after a brief period of strengthening last week. Expectations of economic resurgence in other jurisdictions, such as the EU, that would follow the U.S., are driving some investment flow in those places. With the Fed keeping its policies unchanged and signaling that interest rates are unlikely to rise in the foreseeable future, as well as the European Central Bank leaving monetary policy settings unchanged in their meeting last week, the EUR-USD rate already surpassed its March high.
USD-CAD hit year-low marks this week. The broader outlook remains skewed downward as the Central Bank of Canada continues to taper its quantitative easing program.
(Related insight: Read "Strategies for managing FX volatility")
The Organization of the Petroleum Exporting Countries (OPEC) and its allies, a group known as OPEC+, stuck to its plans this week for a gradual easing of oil production curbs from May to July. Brent and U.S. West Texas Intermediate prices both rose for the fourth straight day, reaching a six-week high on Friday, signaling bullish forecasts of recovering demand are outweighing growing concerns about an increase in COVID-19 cases in countries like Brazil and India.
On the metals front, hot-rolled coil and busheling scrap futures inched higher during the week, as short-term supply constraints still weigh on the market, pushing prices higher for longer, as steel companies are expected to maintain current levels of U.S. steel production.
President Biden’s trillion dollar proposed infrastructure plan, known as the American Families Plan, could impact commodities used in construction, such as copper and steel.
(Related insight: Read "Using commodity collars to manage market volatility")
The Week Ahead
As more states fully reopen, the U.S. economy looks to continue the recovery from the pandemic. Key economic data including motor vehicle sales, construction spending, and factory orders will be released next week and give a glimpse into domestic production so far this year.
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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.21-0131
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