Dovish sentiment prevails at Jackson Hole
Corporates | Kennett Square, PA
The Jackson Hole Economic Symposium took place last Thursday and Friday under the backdrop of an improving employment environment but with continuing concerns about the spread of the Delta variant. Fed Chair Powell’s dovish comments led to a softening of the dollar and slight drop in rates following his announcements. Commodity prices continued to rise throughout the week due to supply constraints.
Since 1978, prominent central bankers, finance ministers, academics, and financial market participants have convened in scenic Jackson Hole to discuss monetary policy. Emblematic to the current challenges facing the economy, the event was moved virtual for the second consecutive year as uncertainty caused by the Delta variant continues to fester. Preceding the symposium this year, market watchers speculated whether Chair Powell would divulge any details regarding the impending tapering of the Fed balance sheet. The Fed indicated they are likely to begin reducing bond purchases as the labor market continues to improve. The unpredictability of the Delta variant and lack of internal consensus within the FOMC caused anticipation of any major tapering announcements to dissipate in the days before the conference. Ultimately, Chair Powell maintained that tapering is likely to begin by the end of this year and that tapering decisions should be viewed independently of interest rate hikes. The November FOMC meeting remains the most likely timing for a formal announcement. Chair Powell’s remarks also laid out the dovish case for inflation, presenting the argument that inflation was likely to be transitory and in line with their objectives for the long run. The 10y Treasury rose steadily this week on the announcement of full FDA approval for the Pfizer vaccine and renewed calls from St. Louis Fed President James Bullard to begin tapering. Rates fell slightly following Chair Powell’s remarks on Friday to close the week at 1.305%.
(Related insight: Read, "Recapping Powell's Jackson Hole 2021 Speech")
Dollar strength softens following Powell’s remarks
The U.S. dollar remained steady this week as the market awaited signals from the Jackson Hole conference. The terrorist attacks in Afghanistan and more hawkish comments from FOMC members briefly bumped the dollar higher entering Friday morning, but those gains were quickly erased by Chair Powell maintaining a fairly dovish stance in his remarks. The dollar fell to its lowest level since mid-August following his speech.
(Related insight: Read “Six key steps to implementing an operational FX program”)
Aluminum hits record high
Last Friday, aluminum prices jumped to $2,658/ton, the highest price since April 2018. The surge was driven by curbs in production in China. A heightened focus on controlling emissions led to a 10% output cut among the five major Chinese smelters in Xinjiang during the first seven months of this year. Additionally, a major fire at an aluminum plant in Jamaica further raised concerns of supply constraints. The price of steel has also consistently posted record high prices this year as China seeks to keep production at 2020 levels. Steel prices rose 87% this year to $1900/ton after averaging $600/ton during 2019, before the pandemic. Oil also rallied last week fueled by the weakening dollar as well as concerns over the impending storm in the Gulf of Mexico.
The market will focus on August employment numbers, which the U.S. Bureau of Labor Statistics will release on Friday. The tapering discussions at the next FOMC meeting will depend heavily on whether the trend of positive job reports continues. Hurricane Ida has not substantially impacted oil prices to date, but the market will closely monitor how quickly offshore production and refineries return to full capacity.
Subscribe to receive our market insights and webinar invites
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.21-0233
Our featured insights
Banks tightened and the market rallied: what’s going on?
The European Central Bank (ECB), Bank of England (BoE), and U.S. Federal Reserve (Fed) all raised their respective benchmark rates last week. The ECB raised rates by 50 basis points to a key rate of 2.5% on Thursday and signaled another 50-basis-point hike was coming at the next meeting in March....
GDP, PCE take steps in the right direction ahead of Fed meeting, China’s reopening leads to commodities shift
December metrics for GDP and inflation came in at promising levels, keeping market expectations consistent ahead of this week’s FOMC meeting. China’s reopening leads to increased economic activity, including increased demand for metals and oil, while natural gas struggles due to unexpectedly warm...
Retail sales, producer price data suggest cooling economic activity
Markets responded positively to declining PPI and retail sales figures, suggesting that U.S. economic activity, and notably inflation, is slowing. Investors are pointing to the data as another piece of evidence that the Federal Reserve will be able to soften its hawkish stance on rate tightening...
Labor market remains stoic as U.S. inflation slows, dollar weakens
The Federal Reserve appears to be in control of inflation after the most recent consumer price index report. Questions linger regarding future rate increases and the subsequent impact on the labor market. The dollar continues its march down from last year’s highs.
2023 corporate treasury trends
Corporate treasury and accounting teams face a daunting list of concerns as they plan for 2023. Inflation at multi-decade highs, a war in Europe for the first time in 75 years, global central bank tightening, a roller coaster ride in on equity prices, and recession fears all pose challenges to...
U.S. jobs market remains strong, nonfarm payrolls data suggest slowing inflation
December payrolls surpassed expectations Friday morning as the U.S. added 223,000 jobs to the economy. While the labor market remains strong, investors noted that wage inflation appears to be easing. On the commodity front, oil and natural gas markets lagged to start the year due to global demand...
Markets mixed as focus turns to 2023
Markets were largely quiet around the holidays, with strength in the jobs market and signs of reduced inflation helping to provide some risk-on sentiment. At the same time, the rise in COVID cases in China put downward pressure on demand forecasts for next year.
The market is fighting the Fed yet again
After inflation, retail sales, empire manufacturing, and the Philadelphia Fed business outlook all came in below estimates last week, the market — as evidenced by Treasuries and forward curves — broadly disagrees with the Fed’s interest rate outlook.