Jobless claims again surpass one million and Fed delays identifying targets
Corporates | Denver, CO
SummaryVolatility is expected as the market reacts to initial jobless claims, consumer confidence numbers, and the Republican National Convention. While existing home sales beat expectations, jobless claims once again exceeded one million and the Fed pushed back the timing of its forward guidance 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.
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.)
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?”)
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.
Talk to a hedging or hedge accounting practitioner about your program.
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.20-0328
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