Federal Reserve reiterates plans for rate hikes amid mixed economic data

Federal Reserve minutes indicate continued rate hikes

The Federal Reserve meeting minutes released last week showed that the Fed does not have any plans to ease rate hikes while inflation continues to persist at high levels. Markets began predicting a higher likelihood of a 50-basis-point rate hike in September after Federal Reserve Chair Jerome Powell indicated at his July 27 press conference that the key rate was “right in the range of what we think is neutral.” The Fed minutes, however, reiterated the Federal Reserve’s commitment to lowering inflation to more acceptable levels. Markets are now pricing in a slightly better than 50-50 chance of a 75-basis-point hike over a 50-basis-point hike.

Treasury yields rose on Friday after jobless claims came in lower than expected. 250K individuals applied for unemployment benefits, coming in below estimations of 260K. The 10-year treasury rose nearly 11 basis points on Friday before closing nine basis points higher. However, the index remained sharply inverted with the two-year treasury yield. The two-year treasury closed Friday 26 basis points higher than the 10-year yield. Chatham clients are continuing to look at forward-starting swaps to lock in the current inverted shape of the curve for longer tenor trades, particularly for cases of extending existing swap maturities.

(Related insight: Read, "Interest rate swaps vs. caps: corporates weigh the alternatives")

A week of mixed economic data

The NAHB monthly confidence index fell six points to 49, coming in well below surveyed expectations of 54. Home builder sentiment continued to take a sharp turn downwards and has dropped for eight consecutive months after reaching 85 points in January. August now represents the first time since May 2020 that the home builder confidence index has fallen below 50.

Meanwhile, retail sales were flat for July, but actually grew by 0.4% when excluding auto sales and rose 0.7% when excluding autos and gasoline. This was largely viewed as positive news showing that consumers used their savings on gas to spend in other areas.

U.S. dollar has its best week in years

The U.S. dollar index rose over 0.6% Friday to end the week up 2.4%, representing the index’s largest weekly gain since April 2020. The dollar hovered near parity with the Euro again on Friday after crossing that threshold in July. Investors flocked to the dollar after the Federal Reserve meeting minutes clarified the likelihood of continued rate hikes.

Oil demand concerns continue to dampen oil prices

Brent crude oil futures remained below $100 per barrel despite U.S. crude inventories dropping after reports of exports reaching five million barrels per day. Those export levels are record highs for the U.S. oil industry and helped fuel the backtracking of losses from earlier in the week.

Looking ahead

All eyes will be on the Jackson Hole economic symposium scheduled for August 25–27. Federal Reserve Chair Jerome Powell is scheduled to speak on Friday, August 26, the same day that the PCE price index will be released.

(Related insight: Read "Corporate treasury leaders discuss hot topics at Chatham’s Financial Risk Management Summit")