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Market Update

Investors weigh possible Fed rate hikes and mounting Ukraine tensions

Date:
January 24, 2022

Summary

U.S. manufacturing data and housing figures showed mixed results this past week, while the 2Y and 10Y treasuries rose to their highest levels since early 2020. The market continues to pay close attention to remarks from Fed officials as the FOMC will meet on January 25 and 26.

U.S. economic data

Empire state manufacturing data suggested weak growth after a period of significant expansion. The index came in at -0.7%, contrary to analyst projections of 25%. Although delivery times and unfulfilled orders continue to increase, firms remain optimistic that the trend will improve over the next six months. Housing starts and permits continue to show robust growth, an increase driven by the uptick in multifamily structures. The housing market index for January remained relatively steady, although the industry continues to face high material costs and labor shortages, delaying single-family home construction times.

Oil market

On the commodities front, energy prices rose to a multi-week high over supply concerns. Brent crude briefly traded above $89/barrel on Wednesday while WTI reached a 7-year high and traded above $86/barrel. Disruptions in the Kirkuk-Ceyhan pipeline (running from Iraq to Turkey) and geopolitical concerns involving Russia’s ongoing conflict with Ukraine pushed Brent and WTI prices upwards. Demand for energy continues to rebound as seen by the increase in global flights and higher road traffic compared to last year.

Interest rates and the FOMC meeting

This past week, the 2Y and 10Y treasuries rose to 1.03% and 1.83% respectively, the highest levels since early 2020. The uptick in treasuries was largely driven by the prospect of the Fed’s intention to raise rates in subsequent months and over the next year. Many corporates are re-evaluating their floating rate risk profile in expectation of a higher rate environment. For a deeper dive into current market dynamics and hedging strategies, register for our February 3 webinar, “Semiannual Market Update for Corporations." While the Fed is expected to maintain the Fed Funds rate at 0%-0.25% at this month’s FOMC meeting, the market is currently pricing in a high likelihood for one rate hike in March.

The week ahead

This week markets will continue to monitor news coming out of the FOMC meeting, along with Chairman Powell’s remarks. We also expect a slew of economic data related to consumer confidence, inflation, durable goods, and GDP.

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