CPI release offers moderate relief
- August 16, 2021
Balance Sheet Risk Management
Financial Institutions | Kennett Square, PA
Prior week summary
The Dow Jones Industrial Average and the S&P 500 extended their runs last week, setting record highs, and long-term Treasury yields declined modestly as market participants digested the latest inflation data and comments from Federal Reserve officials. The 10-year Treasury yield remained violatile last week with the 10-year yield rising as high as 1.38% intraday on Thursday before falling substantially on Friday to 1.29% on the back of a much weaker-than-expected consumer confidence survey release. Although Friday’s consumer confidence update soured investor sentiment at the end of the week, market participants largely focused on the latest inflation readings last week in the form of the Consumer Price Index (CPI) and the Producer Price Index (PPI). Consumer price increases appear to be slowing down from the blistering pace seen earlier this year. According to the Labor Department, the headline CPI figure increased 0.5% in July as the pace of price increases for many reopening-sensitive segments, particularly used automobiles, eased and the pace of shelter price increases accelerated due to an influx of vacationing Americans. While the latest headline release broke a four-month streak of expectation-beating prints, the yearly CPI figure remains substantially elevated at 5.4% for July, a level not seen in nearly 13 years if excluding this June’s identical increase. Wholesale prices, on the other hand, have yet to see substantial moderation from levels seen in the first half of 2021. Supply chain bottlenecks and elevated commodity prices featured in the July PPI release, which indicated that wholesale prices rose 1% month over month, well above the consensus estimate and matching the increase seen in June. Following the impressive July non-farm payroll release from the week prior, Federal Reserve officials weighed in on the tapering debate with many officials hinting at a reduction in the pace of the $120 billion per month asset purchase program by year-end. Speaking to the media on Tuesday, Chicago Federal Reserve President Charles Evans offered his thoughts on both the tapering timeline and composition saying, “I do expect that we are going to be at the point where we’ve seen substantial further progress later this year, probably later this year. I don’t think it’s going to be into next year,” and noting, “I think that when we ultimately decide to taper, if we were to do it in proportion to the way that we’ve been purchasing things — reducing them in line with those proportions — that would be fine.”
After weeks of negotiations and a marathon weekend filled with filibusters, the Senate passed the $1 trillion bipartisan infrastructure bill on Tuesday with a vote of 69–30. The bill calls for approximately $550 billion in new spending and aims to repair many of the nation’s roads and bridges, boost broadband access across the country, and improve public transit infrastructure, among many other objectives. While the bill has significant support in the House of Representatives, Speaker of the House Nancy Pelosi has indicated that the much larger $3.5 trillion reconciliation bill that focuses on many of President Biden’s top priorities must also reach her desk before she will hold a vote on the Senate infrastructure bill. Senate Majority Leader Chuck Schumer praised the bill and foreshadowed the $3.5 trillion reconciliation bill to come shortly before the bill’s Senate passing saying, “Today the Senate takes a decades-overdue step to revitalize America's infrastructure and give our workers, our businesses, our economy the tools to succeed in the 21st century. Of course, we Democrats believe we need to do much more. We are moving on to a second track, which will make generational transformation.”
SOFR swap activity continues to pick up in the wake of the SOFR First initiative. In the second week of trading following the launch of the initiative, SOFR swap notional totaled $135.2 billion across 1,448 trades, both notching record highs and representing a significant pick-up from the levels seen the week prior.
The look forward
Market participants are gearing up for a busy week of economic data releases with updated figures on the Empire Manufacturing Index, retail sales, industrial production, building permits, housing starts, jobless claims, and the Philadelphia Fed Business Outlook Survey, among others, dotting the economic calendar. The minutes of the latest FOMC meeting are released on Wednesday.
Market implied policy path (Overnight indexed swap rates)
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.21-0218
Our featured insights
Hawkish FOMC meeting sends yields higher
In yet another eventful week, the major U.S. equity indices ended flat to modestly higher while Treasury yields saw significant increases on the back of strong economic data and a hawkish FOMC meeting.
Debt ceiling talks take center stage in Washington
The major U.S. equity indices moved lower for the second consecutive week and long-term Treasury yields increased modestly as market participants digested the latest inflation readings, political wrangling on Capitol Hill, and the continued spread of the COVID-19 delta variant.
U.S. real estate and capital markets update Q3 2021
As we wind down on summer 2021, many Americans are returning to the office and sending their children back to school. We recently reviewed the effects of COVID-19 on the U.S. economy and takeaways for the real estate market during our semiannual market update webinar. On September 15,...
European real estate and capital markets update Q3 2021
It’s back-to-school month for most children, and back to the office for an increasing number of workers too. What better time to host our semiannual market update webinar for real estate? On 15 September, participants listened to our experts, Adrian Ng and Jamie Macdonald, provide an overview of...
Supply chain disruptions send prices higher
In a holiday-shortened week, the major U.S. equity indices moved lower while long-term Treasury yields ticked modestly higher as signs of firming inflationary pressures, hawkish comments from Federal Reserve officials, and the latest legislative developments in Washington dominated headlines and investors’ attention.
August employment report misses expectations
In the lead-up to the holiday weekend, the major U.S. equity indices ended the week mixed with the S&P 500 and Nasdaq Composite Index setting new intraday highs as market participants dissected the latest economic data, most notably the August nonfarm payroll report, and comments from Federal Reserve officials.
Enhance yield with swaps
Excess liquidity in the financial system creates challenges for financial institutions. Balance sheets demonstrate greater sensitivity to short-term rates and NIM compresses.
Powell sticks to script at Jackson Hole; ARRC updates Term SOFR derivative guidance
In an eventful week, the major U.S. equity indices and long-term treasury yields moved higher as investors digested Fed Chair Powell’s Jackson Hole comments, mixed economic data, and the continued spread of the COVID-19 delta variant.