Corporations are stuck between increasing interest rates, an appreciating dollar, and declining revenue

In typical economic expansions, the Fed, the market, and the general public all hope for a strong labor market and increasing goods consumption. Unfortunately, due to inflation, it seems the market is now hoping for the opposite. Without a slowdown in job growth and spending, the Fed will be forced to continue raising rates, which could cause a recession. An increasingly hawkish Fed is also contributing to a stronger dollar. For unhedged corporations, the strengthening dollar is lowering the value of non-USD revenues from foreign subsidiaries, reducing earnings estimates.

In the past week, the Personal Income and Outlays report, Job Openings and Labor Turnover Survey (JOLTS), Employment Situation report (Jobs report), and Unemployment Insurance Weekly Claims report all pointed to continued personal consumption and a strengthening labor market.

• The personal income and outlays report showed that personal income and disposable income increased 0.4 and 0.3% respectively in April. Likewise, personal consumption expenditures (PCE) increased $152.3 billion, or 0.9%. All three metrics, adjusted for inflation, increased for the month since the PCE price index only rose 0.2%.
• The JOLTS report showed job openings decreased by just 0.1 million to 11.4 million for April. Hires, separations, and quits all remained little changed and near all-time highs. Notably, the number of layoffs and discharges hit an all-time low for the series at 1.2 million.
  
• The Jobs report beat expectations and showed the economy added another 390,000 jobs in May. After adjustments, the economy added 1,224,000 jobs over the last three months. Both the unemployment rate and labor force participation rate remained steady at 3.6% and 62.3% respectively.
  
• Finally, the weekly claims report for the week ending Friday, May 27 showed that weekly jobless claims beat expectations and fell 11,000 to 200,000 individuals. Continuing claims also dropped 34,000 to 1.309 million and private payrolls increased 128,000.
  

In a normal market environment, all this positive economic data would be great news. However, in the current upside-down inflationary environment it sent equities lower and rates higher as the market braced for additional hawkish policy from the Federal Reserve. For the week ending Friday, June 3, the S&P was down 1.20%. More importantly for corporations, swap rates dramatically increased over the same period and the dollar continued to strengthen as shown below:

Any news of labor market weakening, personal consumption falling, or inflation easing will prompt rates to fall moving forward. It will also contribute to the dollar weakening. Unfortunately, that means corporations can expect their sales to fall in tandem with interest rates and dollar deprecation. To remove one aspect of that volatility, many companies are hedging their interest rate and foreign currency exposures.

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