May employment report falls short of expectations
- June 7, 2021
Balance Sheet Risk Management
Financial Institutions | Kennett Square, PA
Prior week summary
In a holiday-shortened week, the major U.S. equity indices moved higher as the scheduled release of several high-profile economic indicators, continued negotiation of the proposed infrastructure bill, and wild trading in retail-trader-favored equities dominated headlines and captivated the attention of market participants. After moving gradually higher for the majority of the week, the yield on the 10-year U.S. Treasury ended the week modestly lower, finishing the week at 1.56%, approximately two basis points lower than where it ended the week prior. Notably, the 10-year breakeven inflation rate followed suit continuing its multi-week decline, and now sits at 2.42%, roughly 18 basis points off the recent highs seen in mid-May. Mid- and long-term treasury yields have traded in a fairly tight range since the beginning of April as investors continue to digest the latest data and piece together what it means for the U.S. economy going forward. Last week, market participants were the beneficiaries of a deluge of economic data updates that painted a rather mixed picture of the U.S. economy. Tuesday’s release of the national ISM Manufacturing Index posted a 61.2 level, above both the consensus expectation and April’s 60.7 reading. A strong showing from the new orders component propelled the increase, but supply chain woes continue to weigh on the industry with a new high in order backlogs and the input prices component remaining near the multi-year high. The services sector continues to show strength with the ISM Services Index reporting a 64.0 level for May, the highest reading in the series’ history. Each of the 18 service industries measured in the report notched gains in May, but like its manufacturing industry counterpart highlighted current order backlogs, firming price pressures, and slow hiring as headwinds for the industry. Market participants largely turned their attention to the labor market at the end of the week as updated figures on the ADP employment report and the May non-farm payroll report were released on Thursday and Friday, respectively. The ADP employment report estimated that the U.S. economy added 978,000 private-sector jobs in May, well above the consensus estimate and the April reading. Friday’s release of the non-farm payroll report fell below expectations again reporting 559,000 job additions for May. In a bright spot, the unemployment rate fell more than expected to 5.8%, down from 6.1% in April, although the labor force participation rate also declined from 61.7% to 61.6%.
With the Federal Reserve speaking engagement blackout quickly approaching as the next FOMC meeting draws near, the Fed speaking calendar was very active last week with discussions ranging from when to begin tapering the Fed’s $120 billion per month asset purchase program to the impact of climate change on monetary policy. Discussions on when to start talking about a plan for pairing back the Fed’s asset purchase program has been a source of much conversation from Federal Reserve officials in recent weeks and last week was no different. New York Federal Reserve President John Williams suggested that the U.S. economy is still in need of support but that discussions around tapering are welcomed saying, “The economy has improved, and I think it’s on a good trajectory, but to my mind, we’re still quite a ways off from reaching the ‘substantial further progress’ that we’re really looking for, in terms of adjustments to our purchases,” but noted that he does, “think it makes sense for us to be thinking through the various options that we may have in the future — talking about how the economy is doing, where we see it going, and understanding how that may play out over the coming months.” Federal Reserve Chair Jerome Powell spoke on climate change with ECB President Christine Lagarde and China’s central bank chief Yi Gang on Friday but noted that, “Today, climate change is not something that we directly consider in setting monetary policy.”
Negotiations between Senate Republicans and the White House continued last week as the two sides look to find common ground on an infrastructure bill. President Biden met with chief GOP negotiator Senator Shelley Moore Capito on Friday, but they did not reach an agreement . According to the White House, “The President expressed his gratitude for her effort and goodwill, but also indicated that the current offer did not meet his objectives to grow the economy, tackle the climate crisis, and create new jobs.” Senator Capito and President Biden have agreed to continue discussions on Monday. As a bipartisan deal remains uncertain, House Democrats unveiled a $547 billion infrastructure proposal dubbed the “INVEST in America Act” on Friday. Notably, the proposed bill’s price tag sits far lower than both the Republican bill and the Biden administration proposal. While the bill’s prospects are unclear, the contents of the bill focus primarily on “traditional” infrastructure with approximately $343 billion dedicated to roads, bridges, and safety, $95 billion for freight and rails, and $109 billion for public transit systems. In a statement unveiling the bill, House Transportation and Infrastructure Committee Chair Peter DeFazio touted the proposal saying, “The INVEST in America Act puts a core piece of President Biden’s American Jobs Plan into legislative text—seizing this once-in-a-generation opportunity to move our transportation planning out of the 1950s and toward our clean energy future.
While AMERIBOR and the Bloomberg Short-Term Bank Yield Index have garnered much of the media attention for non-SOFR-based alternatives to LIBOR, IHS Markit unveiled two credit-sensitive rates on Tuesday, the USD Credit Inclusive Term Rate (CRITR) and the USD Credit Inclusive Term Spread (CRITS). CRITR is designed for use as a stand-alone index, while CRITS is designed as a credit “add-on” to a risk-free rate such as SOFR. Both CRITR and CRITS are currently available in overnight, one-month, three-month, six-month, and 12-month tenors. In a statement released unveiling the two new rates, IHS Markit described the underlying transactions that serve as the inputs for the rates saying, “CRITR and CRITS are the first credit-sensitive rates based on extensive constituent bases — they track most USD institutional certificate of deposit, commercial paper and short-term corporate bond transactions using a publicly-disclosed, robust rules-based methodology and compliance framework.” Notably, neither rates are currently available for use.
The look forward
While the absolute level of data releases is light for the upcoming week, market participants are looking forward to updated figures on inflation as the Consumer Price Index is scheduled for release. Additionally, investors will receive updated figures on wholesale inventories and jobless claims. Federal Reserve officials will be silent this week, entering the blackout period before the FOMC meeting on June 15–16.
Market implied policy path (Overnight indexed swap rates)
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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.21-0163
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