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Market Update

Fed turns hawkish; Manchin imperils the Build Back Better Act

December 20, 2021
  • william smith headshot


    Bill Smith

    Associate Director
    Balance Sheet Risk Management

    Financial Institutions | Kennett Square, PA


In a week packed with economic data releases, the FOMC monetary policy meeting, and political wrangling in Washington, the major U.S. equity indices, along with Treasury yields, moved lower on the week.

Economic data

  • Market participants were the beneficiaries of a deluge of economic updates last week with the Producer Price Index (PPI), Empire Manufacturing Index, the Philadelphia Fed Business Outlook Survey, and retail sales, among others, dotting the economic calendar.
  • According to the Labor Department, wholesale prices increased 9.6% year-over-year, the highest reading in the series history dating back to 2010.
    • The core PPI measure, which excludes the food and energy components, also topped economists’ forecasts and rose a series-high 7.7% yearly.
    • The report comes only days after consumer prices reportedly rose 6.8% yearly and suggests that additional increases to consumer prices may be in the offing.
  • Market participants received updates on the state of the manufacturing industry last week when two regional Fed manufacturing indices, the Empire Manufacturing Index and the Philadelphia Fed Business Outlook Survey, were released.
    • As expected, inflationary pressures remained the focus of the reports.
    • Both indices continued to show elevated price pressures with the Philadelphia Fed Business Outlook Survey reporting that the cost of materials surged to its highest level since 1979, while the prices received on finished products surged to its highest level in 47 years.
    • Consumer demand continues to show strength, with both indices reporting strong new orders readings. Notably, the Philadelphia Fed index reported the strongest new orders reading since 1973.
  • Finally, retail sales cooled considerably in November, increasing 0.3% in November, the smallest increase in four months and well below the consensus estimate of 0.8%.
    • Many analysts suggested that the retail sales miss was a function of savvy shoppers completing holiday shopping earlier in the season due to supply chain constraints.
    • Declines in sales at department stores and electronics stores led the drop.
    • In a bright spot, October’s impressive reading was revised higher to 1.8% from 1.7%.

            Debt ceiling lifted; Manchin throws cold water on Build Back Better Act

            • After both chambers of Congress cleared procedural hurdles the week prior, the House and Senate each voted to raise the debt ceiling by $2.5 trillion on Tuesday and Wednesday, respectively.
            • President Biden signed the bill into law on Thursday, one day after the Treasury Department estimated the U.S. government would be unable to pay its bill in mid-November.
              • The $2.5 trillion increase is expected to allow the U.S. government to cover financial obligations into 2023 and, importantly, beyond next year’s mid-term elections in November.
            • While the debt ceiling captured much of Congress’ attention early in the week, negotiations around the current $2 trillion social and climate spending bill, dubbed the Build Back Better Act, dominated headlines to end the week and into the weekend.
            • Senator Joe Manchin of West Virginia expressed opposition to the roughly $2 trillion bill throughout the negotiation process and remains a key player in the passage of the bill, given the need for all Democrats to vote for the package in the evenly split Senate.
            • While Senate Majority Leader Chuck Schumer acknowledged the bill would not pass before his Christmas Day deadline earlier in the week, Senator Manchin turned heads during a Sunday interview when he said, “I can’t vote for it. This is a no on this legislation.”
              • The move throws a wrench in what President Biden hoped would be the hallmark piece of legislation under his administration.
              • The White House was quick to comment after hearing Manchin’s comments, indicating that they would, “continue to press him to see if he will reverse his position yet again, to honor his prior commitments and be true to his word.”
              • Although the situation is very fluid, it now appears that a revised bill, more tailored to the goals of Mr. Manchin, is the most likely path forward to completing some form of the Build Back Better Act’s legislative priorities.

                    FOMC quickens taper pace, increases rate forecasts

                    • In the latest FOMC meeting, Fed officials struck a squarely hawkish tone as the FOMC announced a quicker end to its asset purchase program and forecasted as many as four 25 basis point hikes in 2022.
                    • Following the two-day monetary policy meeting, the FOMC announced that the central bank will increase the pace at which they taper the current $90 billion per month asset purchase program, reducing purchases by $30 billion per month, instead of the $15 billion per month reduction seen in November and December, beginning in January.
                      • In the statement following the meeting, the FOMC noted that the $30 billion per month reduction pace would likely remain consistent in the following months, which moves up the expected end of the asset purchase program from June to March.
                      • With the desire to give the FOMC more flexibility, the statement noted that while the $30 billion reduction per month pace is expected, the FOMC “is prepared to adjust the pace of purchases if warranted by changes in the economic outlook”.
                    • In addition to changes to the taper timeline, the FOMC also released the latest Summary of Economic Projections, which indicated that only six of the 18 FOMC members saw fewer than three 25 basis point hikes in 2022.
                    • The latest Summary of Economic Projections marks a stark contrast from the forecasts released in September, where not a single FOMC official estimated three 25 basis point hikes in 2022.
                    • Finally, in a very expected move, the FOMC left the target range unchanged at 0.00% - 0.25%.

                        Interest rates

                        • With a hawkish Fed and the transmissible Omicron variant clouding the economic outlook, Treasury yields moved lower across the curve, resulting in a flatter curve week-over-week.
                          • The 10-year Treasury yield fell approximately seven basis points over the week, with most of the decline coming on Monday as omicron variant fears returned to the forefront.
                          • Short-term yields also moved lower but far lesser in magnitude. The 2s/10s basis continued to decline and ended Friday at approximately 77 basis points.
                        • Inflation expectations also trended lower even as the Producer Price Index reported a series high on Tuesday.
                          • The Fed-watched 5-year forward, 5-year breakeven inflation rate declined approximately three basis points to 2.11%.
                        • Consistent with the recent moves lower in Treasury yields, we have seen increased activity on our desk hedging for higher rates as the relative cost to enter into a pay-fixed swap has declined.
                          • Looking at a 5-year Fed Funds interest rate swap, the negative carry associated with entering into one of these structures declined approximately 9 basis points over the week to 0.95%.
                        • While many Fed officials forecasted at least three 25 basis point hikes in 2022, the market is still only fully pricing in two hikes for 2022.
                          • The timing of those two hikes changed somewhat last week as the second hike is now fully priced in for September compared to November the week prior.

                                Fed approves three bank M&A deals; BMO to acquire Bank of the West

                                • After months of backlogs in the face of significant bank M&A activity in 2021, the Federal Reserve approved three acquisitions on Friday.
                                • Looking at the deals approved, the Federal Reserve approved the following acquisitions:
                                  • First Citizens BancShares, Inc.’s acquisition of CIT Group, Inc.
                                  • Webster Financial Corporation’s acquisition of Sterling Bancorp.
                                  • WSFS Financial Corporation’s acquisition of Bryn Mawr Bank Corporation.
                                • Separately, in one of the biggest acquisition announcements of the year, BMO Financial Group is looking to acquire BNP Paribas SA’s Bank of the West unit for $16.3 billion.
                                  • BMO Financial Group will acquire approximately $105 billion in assets as of Sept. 30 with the purchase price reflecting approximately 1.5x the tangible common book value of Bank of the West.
                                  • Pending regulatory approval, the deal is expected to close by the end of 2022.

                                                The look forward

                                                Upcoming economic data releases

                                                • Leading Index – Monday
                                                • Chicago Fed National Activity Index – Wednesday
                                                • 3rd quarter GDP, third estimate – Wednesday
                                                • Conference Board Consumer Confidence Index – Wednesday
                                                • Existing Home Sales – Wednesday
                                                • Jobless Claims – Thursday
                                                • Personal Spending – Thursday
                                                • Durable Goods Orders – Thursday

                                                  Upcoming Federal Reserve Speakers

                                                  • There are no scheduled speaking engagements

                                                        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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