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Market Update

Inflation continues to rise as crypto plunges

Date:
May 16, 2022
  • Kiki Rogers headshot

    Authors

    Kiki Rogers

    Analyst

    Corporates | Kennett Square, PA

Summary

Inflation numbers are hot off the press and exceeding expectations as reports that the price of goods and services rose by 8.3% since last April. Although there is hope that we are falling from the peak numbers seen in March, consumer fears of a recession are growing and permeating the market — not even the cryptocurrency world can escape.

Inflation headlines

On Wednesday, the Bureau of Labor Statistics released the heavily anticipated inflation numbers for the month of April. The consumer price index (CPI) came in above expectations at 8.3%. Although this number was slightly down from the peak in March, inflation is still reaching highs not seen for 40 years. Core CPI, which excludes volatile food and energy prices, came in at 6.2%, beating expectations of a 6% gain.

Month-over-month inflation numbers also exceeded expectations with an increase of 0.3% on headline CPI versus an estimated 0.2% and a 0.6% gain for core versus an estimated 0.4%. These numbers continue to weigh on workers’ real wages adjusted for inflation, which reported a 0.1% decrease for the month despite an increase in nominal average hourly earnings of 0.3%.

The Fed has already begun to combat these rising prices with a 25 bps hike in March followed by a 50 bps hike in early May. Although investors are hopeful that YoY inflation peaked in March, the release of this data still reveals the Fed has a big job ahead.

Converging treasury rates

Incredible volatility persists in the interest rate market as rates continue to experience large intraday swings. The continuously changing narrative about future rate hikes, reactions to inflation numbers, and ongoing fears of recession remain some of the main drivers behind these swings. With the 10-year U.S. Treasury rate starting the week at 2.902% and the 5-year U.S. Treasury rate at 2.871%, the narrowing spread between the two reflects the relative flattening of the forward curve.

As we continue to see a flattening forward curve and slightly lower rates at longer tenors, corporations could view hedging longer maturities as more attractive given the potential for longer-term rates to increase.

(Related insight: Read, "Hedging future fixed-rate debt")

Currencies, commodities, and crypto

Dollar strength remains a theme in the currency market not only due to inflation but also to continued global fears of a recession driving a flow to dollar assets. The EUR/USD exchange rate is hovering at some of the lowest levels seen since late 2016, ending the week at 1.037.

In the commodities market, oil prices continue to stay above $100/bbl with Brent oil reaching a high of $109.94/bbl last week.

The world of cryptocurrency made headlines last week as the price of Bitcoin and Ether, the two biggest digital currencies, plunged. These were just a portion of the broader sell-off in cryptocurrencies that erased more than $200 billion from the market in a single day. With the new inflation data and growing recession fears, investors are fleeing from cryptocurrencies as the equities market falls.

(Related insight: Read: “5 lies corporates tell themselves about commodity risk”)

The week ahead

As the economic environment continues to weigh on consumers’ minds and spending decisions, U.S. retail sales data will be released on Tuesday with an expectation of 0.6% increase month-over-month in April of 2022. The markets will closely monitor agricultural prices after India’s announcement to ban wheat exports in an effort to manage the overall food security of the country.

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Disclaimers

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.

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