Inflation uneasiness continues to grow
- May 17, 2021
Corporates | Kennett Square, PA
A surge in consumer prices dominated the market’s attention and escalated concerns that inflation could compel the Federal Reserve to raise interest rates sooner than anticipated. The 10-year Treasury climbed to 1.69% before retreating slightly at the end of the week. Colonial Pipeline resumed operations after a ransomware attack and buying panic spurred gasoline shortages across much of the Southeast.
The market continued to digest the disappointing job numbers to start the week, with diverging opinions over the impact of additional federal unemployment insurance. Sixteen governors announced plans to eliminate the programs, while some economists cautioned the move was premature. On Wednesday, attention shifted to inflation as the Bureau of Labor Statistics released Consumer Price Index data for the month of April. CPI jumped 4.2%, exceeding expectations of 3.6% and outpacing a more modest 2.6% increase recorded in March. This spike represents the largest increase in any 12-month period since 2008. The April numbers intensified debate about whether the price increases will be transitory or constitute sustained inflation.
Historically low energy prices in 2020, a global semiconductor shortage, and seasonality factors all suggest some of the price changes could be temporary. However, the University of Michigan Survey of Consumers showed that inflation expectations were also on the rise, increasing 40 bps to 3.1% expected inflation over the next five years. Core CPI (which excludes food and energy) was also up 3% compared to the consensus expectation of 2.3%. Vice Chairman of the Federal Reserve Richard Clarida expressed surprise at the CPI numbers exceeding Fed forecasts during an appearance on Wednesday before reinforcing Fed guidance that there would need to be more persistent inflation before a hike in interest rates. The 10-year Treasury climbed after the CPI data was released to close at 1.69% before retreating slightly later in the week. Technology stocks drove equities down early in the week and then made a partial recovery on Thursday and Friday. Retail sales disappointed slightly but did little to dampen stocks.
Dollar slightly strengthens; Tesla reverses course on Bitcoin
The dollar appreciated marginally with the market pricing in potential higher rates to rein in inflation. USD-CAD was the major outlier as it approached six-year lows due to continued strength in commodities. As the U.S. dollar continues to fluctuate, many multinational corporations are wrestling with forecasting, monitoring, and communicating global performance. The cryptocurrency markets were once again a major source of debate and volatility after Elon Musk announced over Twitter that Tesla was reversing its policy on Bitcoin. The company scrapped plans to accept it as payment and announced they would not acquire any additional Bitcoin due to its environmental impacts.
(Related insight: Watch the on-demand webinar, "Data Driven Approaches to Managing FX Volatility")
Fuel shortages grip Southeast while commodities continue to surge
Colonial Pipeline resumed operations on Wednesday six days after a cyberattack forced it to shut down. Company officials warned it would take several days to return to normal for the nation’s largest pipeline that provides fuel to about 45% of the East Coast. The ransomware attack induced panic buying across the country, which only compounded the supply shortage as the national average price of a gallon of gas ticked above $3 for the first time since 2016. Government agencies relaxed regulations to address the supply shortfall but warned shortages could persist in some areas for the coming weeks. Prices continued to surge across a broad array of commodities, with tin and corn the latest to near all-time highs.
(Related insight: Read "Using commodity collars to manage market volatility")
The market will look to the FOMC minutes released next Wednesday to glean more information on how the Fed anticipates handling inflation under the new framework. Initial jobless claims released on Thursday and existing home sale numbers on Friday will also be closely monitored.
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.21-0147
Our featured insights
Treasury yields climb as Fed holds rates steady
The Fed holds short-term rates steady but indicates at least one rate hike in 2022 as U.S. economic recovery continues.
Inflation plateaus as commodities continue upward climb
August CPI data showed inflation declining slightly from its June 2021 peak, while in energy markets recent supply shocks continue to drive prices higher. Interest rates remain range bound as next week’s FOMC meeting approaches.
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...
August nonfarm payrolls highlight week of mixed data
As the market continued to react to Federal Reserve Chair Powell’s remarks at the Jackson Hole Economic Symposium, August nonfarm payrolls grabbed headlines after falling short of expectations. Elsewhere, data came in mixed as the delta variant continues to weigh on increased demand.
4 questions to ask when evaluating treasury technology platforms
Treasury teams increasingly rely on technology platforms to automate routine tasks, improve accuracy, and inform strategic decisions surrounding working capital, liquidity, and financial risk management. With an ever-growing ecosystem of technology platforms available to treasury and accounting...
Dovish sentiment prevails at Jackson Hole
The Jackson Hole Economic Symposium took place last Thursday and Friday under the backdrop of an improving employment environment but with continuing concerns about the spread of the Delta variant. Fed Chair Powell’s dovish comments led to a softening of the dollar and slight drop in rates...
Rates drop as market reacts to Fed taper discussions and Delta variant concerns
Minutes from the Federal Reserve July policy meeting showed talk of reducing bond purchases by the end of 2021. The COVID Delta variant continues to drive concern, with the Biden administration officially recommending booster shots for fully vaccinated individuals.