Jobless claims again surpass one million and Fed delays identifying targets

Optimism surrounding initial jobless claims falling below one million last week, after 20 consecutive weeks being above that level, faded on Thursday as the claims again surpassed one million. The increase in initial jobless claims reflects the continued closures of small businesses, which is likely to lead to continued bankruptcies and evictions.

Existing home sales numbers for July were released on Friday, with actuals coming in at 5.86 million, beating expectations of 5.5 million and up significantly from June’s actuals of 4.7 million. The real-estate market has seen an upward trend, caused in part by the pandemic, in home sales in suburban and rural areas, which are generally more affordable than urban areas.

The Fed released minutes from its July meeting last week, which offer the market a deeper dive into topics discussed, along with insight into their financial targets. The market was expecting the Fed to sharpen its forward guidance targets for the federal funds rate at the upcoming September meeting. However, it appears that the timing of that guidance will be pushed back to “at some point” rather than September. Of note, the Fed stated that the ongoing health crisis will “weigh heavily” on economic outlook over the medium term, which caused stocks to fall from their near all-time highs.

FX

The EUR-USD rate climbed to over 1.19 on Thursday, its highest level since May 2018, as the euro continued to appreciate against the dollar driven, in part, by optimism surrounding stimulus packages in the Eurozone. On Friday, however, the rate fell back below 1.18 as August Eurozone PMI, an index measuring the activity level of purchases in the manufacturing sector, fell sharply from July.

EUR-USD cross-currency basis narrowed a bit over the last week, which can translate to lesser value for corporates looking to employ a cross-currency swap strategy to synthetically convert dollar exposure to euro. However, while the currency basis is less attractive than it was in May through July, the prevailing USD and EUR interest rate differential continues to support interest expense savings for those companies looking to convert dollar exposure to euro.

(Related insight: Register for the webinar, “Strategic Considerations for Cross-Currency Swaps,” on September 10 at 2:00 p.m. ET to learn more about the economic and accounting nuances of cross-currency swaps in today’s market environment.)

Rates

Treasury rates have been volatile in August, and the 10-year swap rate is up 20 basis points since the beginning of the month. Corporates looking to forward hedge 7-10-year issuances have seen material movements in the rates they are able to achieve. However, rates are still historically low, and corporates can continue to lock in those rates on new hedges, or reduce near-term cash outlay on existing hedges, by using an extend-and-blend strategy.

(Related insight: “Is an extend-and-blend strategy the right solution for your interest rate hedging program?”)

Week ahead

Volatility is expected as the market reacts to initial jobless claims, consumer confidence numbers, and remarks coming from President Trump at the Republican National Convention.