Market reacts to Fed commentary and May jobs report
- June 7, 2021
The market parsed through Fed commentary during the week that hinted at a slightly more hawkish stance before turning its focus to the May jobs report. The nonfarm payroll numbers were slightly below expectations, easing concerns of earlier-than-expected rate hikes and mildly weakening the dollar. Oil continued its climb to over $70 amid a continuing global recovery and supply restraints.
On Wednesday the Federal Reserve released the Beige Book covering a qualitative review of economic conditions based on interviews with business leaders, economists, and market participants. The notes show the economy strengthening at a moderate pace while highlighting businesses’ struggles with supply chain distribution and delivery delays. The Fed noted that “contacts anticipate facing cost increases and charging higher prices in coming months.”
Fed Governor Lael Brainard stressed that vigilance was warranted but “employment data thus far appears to reflect a temporary misalignment of supply and demand that will fade over time as the demand surge normalizes, reopening is completed, and supply adapts to the post-pandemic new normal.” The statement reflected a slight softening of her typically dovish view. Philadelphia Fed President Patrick Harker was more explicit, stating that the Fed should begin considering tapering. The market will continue closely monitoring Fed members as they open the door to discussions on rate hikes and tapering.
The May non-farm payroll numbers came in lower than expected for the second consecutive month. The U.S. gained 559,000 jobs in May, slightly short of expectations of +675,000. The unemployment rate dropped to 5.8% while the labor force participation rate surprisingly receded to 61.6%. About two-thirds of the job losses from the pandemic have now been replaced with 1.8 million still classified as temporary layoffs. The number signifies the recovery is continuing at a moderate pace slightly slower than expected.
Dollar strengthening dulled by May jobs report
The dollar strengthened throughout the week as investors eyed the possibility of the Federal Reserve raising rates faster than anticipated. The U.S. dollar index, which includes a basket of major currencies, reached a three-week high Thursday. The underwhelming job numbers erased most of the gains to leave the dollar index relatively flat on the week.
Russia expressed interest in eliminating dollar exposure in its investment profile and potentially shifting away from crude oil denominated in dollars. The announcement comes as Russia seeks to minimize the impact of U.S. sanctions.
Oil nears a two-year high as global demand recovers
Continuing rise in demand coupled with tightening supply pushed oil above $71 on Friday. Vaccine rollouts continue to be a tailwind, despite countries such as Brazil and India lagging behind. The supply side also supported a bullish stance on oil prices as OPEC committed to maintaining output restraints. Slowing progress in negotiations between the United States and Iran cooled the probability of Iranian oil reentering the market in 2021.
Inflation will continue being the primary focus next week as the Bureau of Labor Statistics releases CPI data for May. The market will look to determine how sustained price increases may be or if they will prove transitory. Inventory data released on Wednesday and consumer sentiment numbers on Friday round out the week’s anticipated events.
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.21-0164
Our featured insights
CPI prints at decade high while Treasury yields plummet to quarterly lows
Inflation data last week printed at the highest level since 2008 as investors weighed its transitory nature. Signaling expectation of continued dovishness by the Fed amid economic reopening, stocks hit record highs. Curiously, Treasuries also rallied as yields fell to three-month lows.
Enable data-driven decision making and avoid potential pitfalls with reporting dashboards
To spot important data trends and crystalize them into actionable insights, corporate treasurers need robust reporting capabilities within their financial risk management systems. Advanced reporting tools should include a complete dataset, flexible-but-focused dashboards, and proactive trend...
Onset of summer greeted with soaring prices
Many Americans celebrating Memorial Day weekend encountered sticker shock as they got back to buying items they haven’t purchased for a while. With prices up 3.1% and expected to keep rising for much of the summer, alarm bells have started ringing, giving the Fed plenty to think about.
Jobless claims trend downward as commodity prices rise
Jobless claims continued their trend downward as commodity prices continue to push upward, signaling an economic recovery. Fed minutes demonstrated a “wait and see” mindset with openness to taper bond purchases in the future.
Inflation uneasiness continues to grow
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...
Achieving automation and efficiency in treasury
Treasury teams can optimize the hedging and hedge accounting process through new technology tools and operating workflows. Whether improving exposure forecast visibility, achieving a faster close process, or improving platform integration, many opportunities exist for treasury to drive efficiencies.
U.S. April employment data disappoints amidst concern for inflation
The U.S. gained 266K jobs in April, falling significantly short of survey expectations of +1M jobs, while Treasury Secretary Janet Yellen indicated that interest rates may need to rise.
Continued recovery spurred on by key data
Persistent Fed policy, optimistic economic data, and the ongoing recovery from the COVID-19 pandemic buoyed investors about the U.S. economic recovery. Worldwide recovery from the pandemic causes the U.S. dollar to weaken. Commodity prices hit multi-year highs as supply outweighs demand....