Mixed first quarter sets stage for volatile year
- May 2, 2022
The familiar story of global volatility continues. U.S. GDP stumbled for the first time since early in the pandemic. Global currencies weakened against the dollar, as dollar strength reached its highest levels since the early 2000s. Supply chain concerns rise from record diesel fuel prices.
U.S. GDP sends mixed signals
For the first time since the early stages of the pandemic, U.S. GDP stumbled to a contraction of 1.4% annualized during the first quarter. Far from the 1% growth that was expected, many participants explain this contraction as a result of technical factors. A sharp reduction in private inventory investment and a wider trade deficit appears to be the culprit. The surprising GDP decline shouldn’t cause panic, according to some experts, due to strong economic fundamentals.
Despite the highest inflation figures in over 40 years, March consumer spending grew 1.1% according to Friday’s report from the Department of Commerce. Consumer sentiment, although still lower than pre-pandemic levels, rose by 10.6% from March to April as measured by the University of Michigan. While pandemic pressures have sent employee turnover to record levels, the strong labor market also points towards economic optimism. Initial jobless claims this week declined to 180,000, unemployment sits at 3.6%, and the number of Americans collecting jobless benefits hit a 50-year low.
Some experts point to persistent inflation, global supply chain issues, and geopolitical instability as reasons to be cautious. This quarter’s reversal, from the previous quarter’s growth rate of 6.9%, blurs year-end expectations. With many factors uncertain, experts agree that volatility is to be expected. The CBOE Volatility Index reached its highest level since mid-March earlier in the week.
(Related insight: Read, “How to maintain treasury proficiency and continuity amid the “Great Resignation’”)
U.S. dollar strengthens
After riding off its best monthly performance in a decade, the U.S. dollar has proved again to be the global shelter in a storm of volatility. The U.S. dollar reached a 20-year high per the Intercontinental Exchange Inc.’s dollar index, which pits the U.S. dollar against a basket of developed foreign currencies. Expectations of aggressive domestic interest rate hikes and weakening global currencies have been the spark.
In particular, the Bank of Japan’s Thursday comments to solidify an ultra-low rate environment by buying an unlimited amount of its 10-year government bonds triggered a sell-off that dropped the yen to a 20-year low against the dollar. The Euro also hit a 5-year low against the dollar at the end of the week from growth concerns and Russian disruptions.
The further divergence of tight and loose global monetary policy is expected to widen interest rate differentials. The Fed is not expected to slow down this year. As of Thursday, CME Group predicts a 51% chance of rates falling in the 275-300 bps range by year-end. Interest rate differentials and the volatility of FX rates prompted many corporates to review and adjust their hedging tactics in this fast-paced, and uncertain, environment.
(Related insight: Read, “7 ways to maximize FX and commodity hedging impact while minimizing costs”)
In just over a month, diesel fuel has reached another new high. The national average shot to $5.16/gallon last week. With few substitutes, concerns of falling inventories and further escalations in Russia/Ukraine have compounded the price pressures. Some experts state the rising prices will be economically detrimental as diesel powers the supply chain. Due to its chemical structure, refining capacity cannot be easily created out of the blue. Diesel is up 42.8% from the start of the year per the Department of Energy.
(Related insight: Register for the webinar, “Staying Cool Amidst Commodity Volatility”)
The week ahead
The U.S. will see a full week of fresh labor statistics. Job openings, job quits, jobless claims, nonfarm payrolls, unemployment rates, and the participation rate are planned for release. A rate hike is also more than expected. Markets will closely tune into the FOMC meeting and Chairman Powell’s statements on Wednesday, May 4. Developments out of the Russian invasion of Ukraine are expected to keep markets alert.
Subscribe to receive our market insights and webinar invites
Concerned about managing financial risk in today's market?
Schedule a call with our team
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.22-0121
Our featured insights
Inflation continues to rise as crypto plunges
Inflation numbers are hot off the press and exceeding expectations as reports that the price of goods and services rose by 8.3% since last April. Although there is hope that we are falling from the peak numbers seen in March, consumer fears of a recession are growing and permeating the market —...
Hedging fundamentals webinar series
Join these introductions to hedging and hedge accounting to gain a foundation for managing financial risk.
Fed raises rates amid a plethora of employment data
The Federal Reserve raised the Fed Funds rate by 50 bps, bringing in the largest hike since 2000 in an effort to fight the highest inflation rate the country has seen in 40 years. Job openings and job quits hit record highs in March, while April nonfarm payrolls came in above expectations.
Uncertainty continues as markets respond to imminent rate hikes, war in Ukraine
Inflation and global turmoil continue to plague the international markets as the war in Ukraine persists. Market expectations in response to impending further rate hikes by the Federal Reserve pushed stocks down and bond yields higher. Stronger relative performance in the U.S. pushed the dollar...
How to maintain treasury proficiency and continuity amid the “Great Resignation”
Today’s job market creates challenges and opportunities for treasury teams. While high turnover warrants increased focus on retention and contingency planning, it also offers the chance to attract new talent, reinvent your team dynamic, and streamline operations.
Headline inflation hits 40-year highs, recession chatter echoes throughout markets
Headline CPI data surpassed its 40-year high in March but slowing core inflation provided investors with a glimmer of optimism. Markets are closely monitoring Fed movements as Chairman Powell attempts to navigate a difficult balancing act of cooling off alarmingly high price pressures while...
Fed hawks have landed
Released Fed minutes show a growing hawkish and tightening mindset across FOMC members. The release drove rates higher as members called for fast balance sheet reduction and double rate hikes in upcoming meetings. Meanwhile, commodity hedges for petroleum products break down.
Consumer confidence, spending, and inflation all on the rise
A busy week of employment data was highlighted by the Bureau of Labor Statistics (BLS) March nonfarm payrolls and unemployment figures. The U.S. 2s/10s yield curve inverted for the first time since September 2019, while crude oil fell after Biden announced a large release from the nation’s reserve.