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Curve steepens; August NFP impresses

September 6, 2022
  • william smith headshot


    Bill Smith

    Associate Director
    Balance Sheet Risk Management

    Financial Institutions | Kennett Square, PA


The hawkish message delivered by Fed Chair Jerome Powell at Jackson Hole the week earlier continued to weigh on investor sentiment last week. Treasury yields, particularly at the long end, legged higher, while the major U.S. equity indices continued to fall from their mid-August highs.

Interest rates

  • Treasury yields continued to march higher after the Jackson Hole Economic Symposium.
    • The long end of the curve saw the most notable increases with the 10-year Treasury yield moving 16 basis points higher to 3.20% by the week’s end.
  • Despite flattening the week prior, the Treasury curve steepened significantly last week to levels not seen since late July.
    • Last week’s action saw the 2s/10s basis inversion nearly halved as it widened 16 basis points to end the week at -0.21%.
  • Several Federal Reserve officials reiterated Chair Powell’s Jackson Hole message last week highlighting the Fed’s actions to date but emphasizing the need for continued tightening.
    • Notably, Atlanta Fed President Raphael Bostic gave his support for a 75 basis point hike in September but suggested that inflation data that “clearly show that inflation has begun slowing” could give a reason for scaling back future rate hikes.
    • Although market pricing is forecasting a change in the Fed’s current policy by next summer, Cleveland President Loretta Mester pushed back on the market’s expectation for Fed rate cuts in 2023 signaling that she does not anticipate a need for rate cuts next year and instead expects the Target Rate to move “somewhat above 4% by early next year and hold it there.”
  • Ignoring the market’s expectations for a summer 2023 rate cut, market pricing is broadly aligned with Mester’s expectations.
    • Looking at Fed Funds futures market pricing on Friday, market participants see a slightly better than 50% chance of a 75 basis point hike at the September 20-21 FOMC monetary policy meeting with the Target Range climbing another 150 basis points from current levels by early next year to 3.75% - 4%.
  • Finally, last week’s comments from Fed officials have cooled inflation expectations somewhat.
    • The major mid- and long-term inflation expectation indicators all declined last week with the five-year breakeven inflation rate falling a substantial 20 basis points to 2.60%, just over 30 basis points below the measure’s yearly average.

        Trading commentary

        • Hedging activity continued in earnest last week as we moved into the final month of the third quarter.
          • As previously noted, the lion’s share of activity remains in strategies that are designed to protect against a downturn in interest rates.
          • Last week, we saw a significant amount of hedging using receive-fixed interest rate swaps to extend the duration of the floating rate asset portfolio and mitigate asset sensitivity.
            • To date, the most often-used derivative instrument to implement these strategies is a plain-vanilla swap, although we have seen a notable rise in the use of option-based products, particularly zero-cost collars, in recent weeks.
        • Finally, as the housing market continues to hum along, we have continued to see clients utilize the flexibility afforded by the portfolio layer method to manage the interest rate risk associated with new mortgage originations.

              C&I loans see growth in Q2

              • According to S&P Capital IQ, Commercial and Industrial (C&I) loan balances grew 3.9% sequentially at U.S. depositories in the second quarter.
                • After lagging in 2021, loan growth has returned to the sector with balances increasing for three consecutive quarters.
                • Looking at the 25 largest C&I lenders in the U.S., 19 of those institutions reported growth in the second quarter, while 21 reported year-over-year growth.
                • Although delinquencies are up slightly in the last quarter, optimism remains high across the banking space with JPMorgan CFO Jeremy Barnum suggesting that C&I activity is “quite robust” during the last earnings call.

                    Economic data

                    • With the Jackson Hole Economic Symposium in the rear-view mirror, market participants turned their attention to several high-profile economic data releases last week.
                    • The manufacturing outlook improved last week after both the national ISM Manufacturing Index and the S&P Global U.S. Manufacturing PMI topped analysts’ expectations.
                      • Digging into the ISM release, improvements in new orders, production, and employment led to the expectation-beating print.
                      • Notably, the report offered a sign that inflationary pressures may be easing after the “prices paid” component of the release declined well in excess of the consensus estimate to a level not seen since June 2020.
                    • After falling significantly to start the summer, consumer sentiment appears to be improving.
                      • The Conference Board Consumer Confidence Index moved substantially higher in August to 103.2, the measure’s highest reading since May.
                    • All eyes turned to the labor market at the end of the week in anticipation of Friday’s release of the August non-farm payroll report.
                      • Despite a dismal ADP employment reading earlier in the week, the August non-farm payroll release surprised to the upside as the U.S. economy added 315,000 jobs in August, down from the 526,000 jobs added in July, but above the consensus expectation for 298,000 job additions.
                      • Finally, the unemployment rate climbed unexpectedly to 3.7% in August on the back of a 0.03% increase in the Labor Force Participation Rate to 62.4%.

                    The look forward

                    Upcoming economic data releases

                    • S&P Global U.S. Services / Composite PMI - Tuesday
                    • ISM Services Index - Tuesday
                    • Beige Book - Wednesday
                    • Jobless Claims - Thursday
                    • Wholesale Inventories - Friday

                          Upcoming Federal Reserve speakers

                          • Barkin, Mester, Brainard, Barr - Wednesday
                          • Powell, Evans - Thursday
                          • Evans, Waller, George - 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


                            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

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