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Market Update

CPI runs hot, Congress paves way for debt ceiling resolution

Date:
December 13, 2021
  • william smith headshot

    Authors

    Bill Smith

    Associate Director
    Balance Sheet Risk Management

    Financial Institutions | Kennett Square, PA

Summary

The major U.S. equity indices snapped two consecutive weeks of declines with the S&P 500 notching its best week since February as investors’ omicron variant fears seemingly subsided and Friday’s inflation reading fell in line with analyst estimates.

Economic data

  • In a light week for economic data releases, market participants focused their attention on the November Consumer Price Index (CPI) report released Friday.
  • According to the Labor Department, consumer prices increased 6.8% over the year, the fastest pace since June 1982.
    • Core CPI, which excludes the often-volatile food and energy components, rose 4.9% over the year, its largest yearly increase since 1991.
  • The latest CPI release fell in line with expectations and came as a sigh of relief for those expecting a higher print. Treasury yields fell in the wake of the report.
  • Digging into the report, increases in energy, food, and shelter prices led the increases.
    • On a yearly basis, gasoline is up 58.1%, food prices are up 6.1%, and shelter costs, which make up approximately one third of the CPI, rose 3.8%.
  • Finally, jobless claims fell to a 52-year low of 188,000 claims for the week of December 4.
    • Analysts were quick to note that seasonal adjustments were largely responsible for the decline in claims, as seasonal adjustments around the holiday season can be particularly challenging.
    • Claims rose by approximately 68,000 on a non-seasonally adjusted basis.

          Congress paves way for debt ceiling resolution

          • After passing a short-term funding bill the week before to ward off a government shutdown, Congress laid the groundwork last week to raise the debt ceiling and avoid a disastrous U.S. default scenario.
          • Treasury Secretary Janet Yellen warned in mid-November that the U.S. could default on its debt obligations if the debt ceiling was not raised or suspended by December 15.
          • Both the House and the Senate cleared procedural hurdles last week that will allow House and Senate Democrats to raise the debt ceiling with a simple majority in each chamber, a move that is expected to take place next week before the December 15 deadline.
            • The vote to allow a onetime loophole that allows for an adjustment to the debt ceiling by a simple majority was brokered by Senator Majority Leader Chuck Schumer and Senate Minority Leader Mitch McConnell last week with this additional legislation being tagged onto a bill that would prevent automatic spending cuts to Medicare beginning in the new year.
          • While a dollar figure is not yet known, Democrats are expected to increase the debt ceiling by approximately $2 trillion, an amount that would allow the U.S. government to meet its debt obligations through the November mid-term elections next year.

                Omicron concerns fade after comments from Fauci, Pfizer

                • U.S. equities rallied substantially to start the week after Dr. Anthony Fauci indicated on Sunday that preliminary omicron data was “a bit encouraging,” but noted that more information is needed to properly analyze the variant’s threat to the public.
                  • CDC Director Rochelle Walensky echoed Fauci’s comments on Thursday and suggested that “the disease is mild” in nearly all omicron variant cases reported in the U.S.
                • As of Friday afternoon, there are 43 known omicron variant cases in the U.S. with no deaths reported to date.
                • Pfizer and BioNTech boosted investor optimism further on Wednesday when they announced a booster shot of their vaccine “neutralized” the omicron variant in lab tests but noted that the standard regiment of two doses of the popular vaccine was “significantly less effective at blocking the virus.”
                  • Wednesday’s announcement from Pfizer and BioNTech came only one day after a lab in South Africa indicated that preliminary data from lab experiments showed a 40-fold reduction in virus neutralization for those with only two doses of the Pfizer/BioNTech vaccine, compared to the vaccine’s effectiveness against the original COVID-19 strain.
                • While much remains unknown about the omicron variant, the positive and encouraging commentary offered by both government officials and Pfizer/BioNTech worked to dispel some of the fear that rattled markets since the discovery of the nascent variant in late November.

                  Interest rates

                  • Short and mid-term rates continued to rise last week as market participants grew more confident that the Federal Reserve would raise the target range beginning mid-next year, while longer-term yields reversed the moves from the week before and also headed higher.
                  • After compressing to its lowest level in a year, the 2s/10s basis, a measure of yield curve steepness, widened approximately eight basis points to 0.82% by the end of the week.
                  • Inflation expectations increased modestly on a weekly basis with the 10-year breakeven inflation rate increasing four basis points on the week.
                    • Notably, the 10-year breakeven moved lower on Friday after the Consumer Price Index release fell in line with consensus expectations.
                  • Expectations for hikes to the federal funds target range remained roughly unchanged in terms of FOMC meeting dates with the first hike expected in June 2022 and a second hike expected in November 2022.
                    • All eyes will be on the FOMC statement and Summary of Economic Projections released at the conclusion of this week’s FOMC meeting as market participants are eager to learn of any updates to the pace of asset purchase reductions or Federal Reserve officials’ rate expectations for 2022, 2023, and beyond.
                  • Looking at activity on our desk, we have seen an uptick in hedges positioned to protect against a rising rate environment in recent weeks as the market’s perception of inflation and fed funds rate hikes has increased in the fourth quarter.

                        Big banks play down omicron impact on loan growth; credit quality improves in the third quarter

                        • Two of the largest U.S. financial institutions, Wells Fargo and Bank of America, reported early but positive signs for fourth-quarter loan growth last week.
                          • The CEOs of both banks indicated that the pick-up in loan growth seen in the third quarter has continued into the fourth quarter with Wells Fargo President and CEO Charles Scharf indicating that his bank has seen, “very, very little” impact on daily activity from the emergence of the omicron variant but admitted that, “we’ll know more in a couple weeks.”
                        • While financial institutions across the country have noted a pickup in lending activity in the second half of the year, credit quality across the banking space also appears to be improving.
                          • According to S&P Capital IQ, key credit categories such as nonperforming assets, nonaccrual loans, and loans past due 30-89 days, among a host of other categories, have declined on both a quarterly and yearly basis.

                                      The look forward

                                      Upcoming economic data releases

                                      • Producer Price Index – Tuesday
                                      • Empire Manufacturing Index – Wednesday
                                      • Retail Sales – Wednesday
                                      • Jobless Claims – Thursday
                                      • Housing Starts – Thursday
                                      • Philadelphia Business Outlook Survey – Thursday
                                      • Industrial Production – Thursday

                                      Upcoming Federal Reserve Speakers

                                      • FOMC monetary policy meeting – Tuesday/Wednesday
                                      • Powell press conference following FOMC meeting – Wednesday
                                      • Waller – Friday

                                            Rates snapshot

                                            Market implied policy path (Overnight indexed swap rates)

                                            Source: Chatham Financial

                                            About the author

                                            • Bill Smith

                                              Associate Director
                                              Balance Sheet Risk Management

                                              Financial Institutions | Kennett Square, PA


                                            Disclaimers

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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.

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