July jobs report shows strength
- August 9, 2021
Balance Sheet Risk Management
Financial Institutions | Kennett Square, PA
Prior week summary
While public health concerns abound over the spread of the highly transmissible COVID-19 delta variant strain, market participants have been largely unphased by reports of increasing case counts and hospitalizations. Instead the major U.S equity indices pushed to new all-time highs last week on the back of strong economic data and the imminent Senate passage of a $1 trillion bipartisan infrastructure bill. It’s been a wild ride for the 10-year Treasury yield so far this year and last week was no different. After falling nearly five basis points on Monday to sit just under 1.18%, the 10-year yield rebounded by the week’s end to finish at 1.31% as market participants digested Friday’s non-farm payroll release. According to the Labor Department, the U.S. economy added 943,000 jobs in July, well above the consensus expectation and marking the highest reading since the initial easing of COVID-19 restrictions in the summer of 2020. The July report highlighted the ongoing reopening of the U.S. economy as over 40% of July’s job gains originated in the leisure and hospitality sector. Unexpectedly, the unemployment rate plummeted to 5.4%, far below the 5.9% unemployment rate reported in June. The strength of the July report added fuel to the already hot tapering debate as market participants attempt to forecast when the FOMC will determine that “substantial further progress” has been reached in the labor market. Dallas Fed President Robert Kaplan turned heads on Wednesday when discussing his preference for the tapering timeline saying, “As long as we continue to make progress in July numbers and in August job numbers, I think we’d be better off to start adjusting these purchases soon.” While the July non-farm payroll report garnered much of the attention for the week, market participants received updated figures on several other high-profile data releases during the week. The ISM Manufacturing Index posted a 59.5 level in July, modestly below the consensus expectation but well within expansionary territory. Although the latest reading falls short of the recent high set in March, the national factory gauge’s July level remains near the top end of the two-year range. The ISM Services Index posted even stronger results, reporting a 64.1 level in July, well above both the consensus expectation and the 60.1 June level. While the strong report is encouraging, the release highlighted significant and ongoing supply-side constraints as businesses report shortages of both raw materials and labor. Durable goods orders and factory orders both topped expectations. Lastly, jobless claims fell to 385,000 claims for the week of July 31, modestly above expectations.
After the $1 trillion infrastructure bill received enough votes to pass in a procedural vote the week prior, Senators worked throughout the week and weekend to tie up loose ends and finish last-minute negotiations culminating in a Sunday night vote to close down debate on the proposed bill. After a weekend of filibusters, the bill received enough votes to end debate on Sunday evening and is now expected to clear the chamber by Tuesday. Once passed, the bill will land in the House of Representatives where its fate remains uncertain. While moderate Democrats have urged Speaker of the House Nancy Pelosi to immediately take up the bill, Pelosi and others have vowed to withhold a vote on the bipartisan bill until a much larger, budget reconciliation bill that focuses on many of President Biden’s top priorities, ranging from climate change to childcare, reaches the House of Representatives. Speaking after Sunday’s vote to end debate on the $1 trillion bill, Senate Majority Leader Chuck Schumer said, “We will move forward to wrap this up as expeditiously as possible, and then move on to the budget resolution. The two-track process is moving along. It's been a process that has been a very good process. It's taken a while, but it's going to be worth it.”
After a successful launching of the SOFR First initiative, trading volumes in SOFR swaps have picked up. Notional tied to SOFR swaps totaled $114.5 billion during the first week of the SOFR First initiative, substantially higher than the four-week average of $82.2 billion before the launch of the initiative. Trade counts are on the rise with 1,243 transactions occurring during the first week of the SOFR First initiative compared to the four-week average of 627 trades. Separately but on the back of the successful initiative, the Financial Conduct Authority and the Bank of England released a statement at the end of July to, “encourage liquidity providers in the LIBOR cross-currency swaps market to adopt new quoting conventions for interdealer trading based on risk-free rates instead of LIBOR from 21 September this year.” The move, like the SOFR First initiative, aims to enhance liquidity in SOFR and encourage market participants to move away from LIBOR.
The look forward
In a light week for economic data releases, market participants will turn most of their attention to updated inflation data in the form of the Consumer Price Index and the Producer Price Index. Several Federal Reserve officials hold speaking engagements throughout the week.
Market implied policy path (Overnight indexed swap rates)
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.21-0214
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