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Market Update

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

Date:
June 6, 2022

Summary

Unlike in typical expansions, a strong labor market and consumer spending are leading to market volatility and turmoil. Stuck between either rising interest rates or falling consumer demand, many companies are being forced to lower earnings estimates and make difficult decisions.

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.

(Related insight: Register for the "Semiannual Market Update for Corporations" webinar)

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About the author

  • Brandon Stitzel

    Analyst

    Corporates | Kennett Square, PA

    Brandon is a rotational analyst within the Global Corporates sector, working with organizations to develop and maintain risk management programs across the interest rate, foreign exchange, and commodities asset classes.

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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