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Market Update

Markets balance tension between optimism and looming uncertainty

October 5, 2020
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    Kevin Jones

    Treasury Advisory

    Corporates | Kennett Square, PA


Marking the first monthly decline since March, September saw a 3.9% contraction in the S&P 500 index, as equity investors faced labor market weakness, impasse on further fiscal stimulus, and the specter of a contested presidential election.

At the same time, a market rally of the last two weeks of the month signaled a tide of optimism on the same issues. These opposing forces have created a tension for market participants in an economy struggling its way through the pandemic, and with one month until the election the market will now assess the ongoing health situation at the White House following the president’s contraction of COVID-19.

The labor markets

Amid such uncertainty as the backdrop, the labor market continues to remain in focus. Despite consecutive months of job growth, the labor market is facing ongoing headwinds. Non-farm payrolls were disappointing Friday morning, with 661,000 jobs added during September versus initial estimates of 859,000, suggesting a potential slowdown in the pace of recovery. On the bright side, unemployment continued to fall, decreasing half a percentage point to 7.9%, but that could merely reflect a decline in the labor force participation rate. Only about half of the jobs erased during the onset of the pandemic have been recovered to date; moreover, layoffs from major corporations during the past week, including Disney, Shell, American Airlines, and Goldman Sachs, signaled a deepening impact of COVID-19 on the jobs sector across industries.

Personal income data

Personal income data released last week also portended economic challenges ahead; after increasing modestly in July, personal incomes were reported to contract by 2.7% during the month of August, reflecting not only job cuts but also the expiry of certain government stimulus packages that had been supporting particular industries and unemployment benefits.

Interest rate markets

As markets grapple with competing headlines, rates markets remain rangebound though still subject to persistent volatility on the longer end of the curve. Highlighting this volatility, the 10-year Treasury rate climbed to an intraday high of 0.71% on October 1 as fiscal stimulus talks appeared promising, only to fall back to a 0.66% - 0.67% range as bipartisan discussions deteriorated over the course of the day. As corporations continue to take advantage of low treasury yields to support debt issuance, many companies are considering pre-issuance hedging given the low rate environment and potential for the yield curve to steepen in future periods. For example, a company can hedge a future 10-year issuance two years forward by locking in a forward-starting swap rate of about 0.834%.

(Related insight: Read “Hedging future fixed rate debt”)

About the author

  • Kevin Jones

    Treasury Advisory

    Corporates | Kennett Square, PA

    Kevin Jones serves Chatham’s corporate clients in interest rate and foreign currency hedging advisory. Kevin’s expertise spans risk quantification and analysis, hedging strategy development, market dynamics, and trade execution.


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