Forward curve steepens as rates continue to climb
Corporates | Kennett Square, PA
The Federal Reserve remained in focus during a relatively light week on the economic calendar. Rates continue to follow an upward trend as expectations of sooner-than-anticipated rate hikes gain momentum. The U.S. dollar softened despite the interest rate outlook, while energy prices remain elevated.
Interest rates continued to climb this week amid increasingly hawkish comments from Fed officials and lower-than-expected jobless claims. Short-term rates have seen a particularly sharp rise as the market begins adjusting expectations regarding when the Federal Reserve will begin to lift rates. On Thursday, Atlanta Fed President Raphael Bostic, a noted monetary hawk, said he anticipated rate hikes “late third, maybe early fourth” quarter of 2022. The 10Y Treasury topped 1.68% following Bostic’s comments and a positive beat in jobless claims. Some of those gains were relinquished on Friday after Chair Powell’s comments at a Bank for International Settlements conference. Chair Powell highlighted the difficult dilemma currently facing the Fed as inflation moves higher but slack remains in the labor market. Chair Powell stated the Fed is on pace to begin tapering balance sheet purchases while also suggesting it would be premature to raise rates given the labor market still has room for growth. The continued movement of the forward curve has sparked more discussions with corporations looking to lock in favorable rates.
Related insight: Watch the on-demand webinar, “What is Our Cost of Hedging? Insights into the Costs and Benefits of Your Hedging Program."
Dollar slips to three-week low before paring losses
The U.S. dollar slipped on Wednesday to three-week lows before recovering some of the losses as the week progressed. The weakness is somewhat unusual given the increasingly hawkish interest rate narrative unfolding in the U.S. As interest rate expectations have moved higher, other factors have weighed on the dollar. A rally from commodity-driven currencies, coupled with expectations that other developed nations could raise rates even sooner than the Fed, shaped the recent bout of U.S. dollar weakness.
Energy prices remain elevated
West Texas Intermediate (WTI) crude oil is currently trading near seven-year highs after capping off its ninth weekly rise in a row. Data released by the U.S. Energy Information Administration earlier in the week showed inventories growing increasingly tight — the Cushing, Oklahoma storage hub fell to a three-year low. The bullish sentiment was temporarily dented on Thursday after projections from the National Oceanic and Atmospheric Administration showed expectations of a winter being warmer than average across the United States. The drop in coal and natural gas prices lessens demand for crude, which has become a more affordable substitute for other power sources in some areas. However, the continued tenuous energy supply situations in Europe, India, and China provided additional upward pressure on prices as the week wrapped up on Friday.
Corporate earnings season is underway, with strong profits thus far fueling a rally in equities to near all-time highs and suggesting a robust recovery is still underway. Investors will be looking for this trend to continue throughout the week while also awaiting the release of inflation and consumer confidence data next Friday.
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.21-0298
Our featured insights
Emergency Bank of England intervention tempers sterling’s nosedive, UK changes course on tax cuts
The Bank of England was forced to take emergency action last week after the pound depreciated to its lowest levels in over 35 years. In response, the government also changed its tune, reversing course on sweeping tax cuts across the U.K. In Europe, inflation readings reached all-time highs as the...
Rising rates have no brakes
Interest rate expectations increase as the Fed votes unanimously to hike the Fed funds rate by 0.75%, while the dollar continues to strengthen in line with recent market trends.
August inflation data spurs risk-off sentiment in markets
The latest U.S. CPI reading came in higher than economists expected last Tuesday, leading to sell-offs in equity markets and a resurgence of recessionary fears as the next FOMC meeting approaches.
Chatham's Q4 2022 outlook: Inflation, market volatility, and LIBOR transition
Watch Chatham's Managing Partner and Chair, Amol Dhargalkar, discuss key trends for the upcoming quarter like inflation, market volatility, and LIBOR transition.
ECB sets record rate hike
A slow economic week was highlighted by the ECB hiking interest rates by 0.75% in response to high inflation and rising energy costs. Jerome Powell reiterated the Fed’s commitment to lower inflation, while WTI and Brent prices fell for the second straight week.
Oil falls amid Russian oil price cap discussions
Interest rate expectations continue to increase along with U.S. dollar strength, while oil falls as the West decides to impose a price cap on Russian oil.
FOMC will continue to raise the Fed Funds rate “until the job is done”
At his Jackson Hole speech, Federal Reserve Chair Powell indicated that the FOMC must continue to raise the Federal Funds rate and hold it at a restrictive level until it is confident inflation is under control. He specified that while the July CPI inflation reading was welcome news, it would not be enough on its own for the FOMC to change course on raising interest rates to an intentionally restrictive level.
Federal Reserve reiterates plans for rate hikes amid mixed economic data
Federal Reserve meeting minutes reiterated plans for continued rate hikes while inflation remains at higher levels. Home builder confidence dropped six points in August, falling for the eighth consecutive month, while the U.S. dollar had its best week since April 2020.