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Market Update

Forward curve steepens as rates continue to climb

Date:
October 25, 2021

Summary

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.

Economic outlook

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.

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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.

Looking ahead

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.

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About the author

  • James Mallon

    Analyst

    Corporates | Kennett Square, PA

    James is an analyst on Chatham’s Corporates Sector, specializing in foreign currency, interest rate, and commodity hedging analytics and strategy.

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