FX and commodities volatility continue despite continued reopenings
As global economies struggle with natural disasters and the surging COVID-19 delta variant, economic indicators are painting mixed stories about recovery. U.S. initial jobless claims hit a pandemic low, while the dollar’s strengthening trend may be wavering in response to a more bullish stance from the ECB relative to the Fed. Commodity prices remain volatile and closely tied to the localized impacts of the COVID-19 delta variant as well as Hurricane Ida.
Encouraging jobs numbers
Last week, jobs numbers wrapped up the summer optimistically, with weekly initial jobless claims hitting a pandemic low of 310,000 for the week ending September 4. These strong numbers significantly beat expectations of 335,000 driven largely by continued reopenings and return to school. This most recent initial jobless claims number further continues the overall positive trend jobs numbers have taken since the beginning of the year. This coming week’s report will be the first to incorporate data after the September 6 expiration of the additional $300 weekly unemployment benefit. Keep an eye out for our comment on that change in next week’s market update.
Bonds remain range-bound
In contrast to the labor market, which continues to strengthen despite concerns related to the COVID-19 delta variant, the 10y has remained low and range-bound at or around 130bps. With no specific timeline around tapering and a slightly more dovish take on stimulus than expected coming out of the Jackson Hole meeting two weeks ago, markets have remained in a wait-and-see posture, peaking around 138bps last week but settling to around 132bps by the end of the week. As potential announcements loom around tapering and stimulus reduction, Chatham clients have been taking the opportunity to hedge outstanding floating rate debt and expected future issuances while rates remain low. Having experienced the 10y’s climb to over 170bps earlier this year, corporates are favoring risk mitigation strategies over waiting to see whether the markets will play out in their favor.
(Related insight: Read "Managing interest rate risk on future debt issuances")
Mixed dollar strength story
Though the U.S. dollar has continued its general strengthening trend, the dollar took a hit last week after the announcement that the European Central Bank (ECB) would reduce its pace of bond purchases throughout the rest of the year due to improving economic conditions. Expectations that the ECB may reduce stimulus at a rate outpacing the Fed has markets forecasting a reduced interest rate differential between U.S. and European interest rates, with potential to push strength back in the direction of European currencies. Chatham will check in as any changes to these trends take place. The ECB also revised its inflation forecast up from its June outlook of 1.9% to 2.2%, coinciding with encouraging reopening results.
(Related insight: Read "Six key steps to implementing an operational FX program")
Crude oil prices resumed climbing as U.S. crude inventory continues to drop due to Hurricane Ida’s impact on Gulf Coast refineries and production facilities. Last week’s drop indicated the fifth week of reduced U.S. inventory with WTI futures climbing up to nearly $70/Bbl last week. Steel prices have been impacted by the delta surge in Asian economies with steel rebar prices rising above CNY 5,500 per tonne in September, moving toward record highs of CNY 6,198 per tonne back in May. Conversely, agricultural commodities like soy and wheat have dropped in recent weeks due to Hurricane Ida’s damage to export facilities; supply has piled up with exporters unable to move their product.
The week ahead
Keep an eye out on Tuesday morning for the UK’s July unemployment numbers, forecast to remain flat at 4.7% compared to the previous June period. Any unexpected numbers from this report could impact the dollar strengthening trend. In the U.S., look for new YoY inflation numbers Tuesday morning. July YoY inflation was at 5.5% while August is forecast to be 5.4%. On Thursday morning we get MoM U.S. retail sales, which are forecast to be -0.5% for the month of August, an improved rate over July’s -1.1%.
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