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Market Update

Powell changes tone, Congress averts government shutdown

December 6, 2021
  • william smith headshot


    Bill Smith

    Associate Director
    Balance Sheet Risk Management

    Financial Institutions | Kennett Square, PA


In a week of heightened volatility, the major U.S. equity indices continued to pull back and the Treasury yield curve flattened as market participants digested mixed economic data, hawkish comments from Fed Chair Powell, and the latest omicron variant developments.

Economic data

  • Market participants received updates on several key indicators last week including the Conference Board Consumer Confidence Index, the ISM Manufacturing and Services Indices, and, most notably, the November non-farm payroll report.
  • According to the Conference Board, consumer confidence dipped modestly in November as consumers grappled with high inflation and omicron variant fears.
    • The Conference Board Consumer Confidence Index currently sits at 109.5, just above its yearly average, but remains well below the 128.90 one-year high seen in June.
  • After several regional manufacturing indices pointed to growth in November, the national ISM Manufacturing Index confirmed that notion increasing modestly in November, albeit slightly below the consensus estimate, on the back of a robust level of both new orders and factory production.
    • Unsurprisingly, supply chain disruptions and labor shortages remained a focus of the industry commentary included in the report as supplier delivery times and the prices paid component improved marginally in November but remained significantly elevated in historical context.
  • After accelerating to a record high in October, the ISM Services Index topped October’s level, setting a new all-time high at 69.1, as consumer demand remained strong.
    • Each of the 18 measured industries reported growth in November with real estate, transportation and warehousing, and retail trade leading the charge.
    • Predictably and like the ISM Manufacturing report, supply chain disruptions and the resulting inflationary pressures were often cited in the industry comments.
  • Finally, the November non-farm payroll report disappointed on Friday as the U.S. economy saw its smallest monthly gain of the year at 210,000 jobs in November, less than half of the consensus expectation.
    • In a bright spot, the September and October payroll figures were revised higher by a net 82,000 jobs.
    • Unexpectedly, the unemployment rate moved 0.4% lower to 4.2% and the labor force participation rate edged higher to 61.8%, the highest level since March 2020.

          Fed Chair Powell changes tone in congressional testimony

          • Federal Reserve Chair Jerome Powell turned heads this week while speaking before Congress.
          • While acknowledging new headwinds from the omicron variant, Powell suggested that the U.S. central bank would consider ending the tapering program, currently scheduled to end in mid-2022, “a few months sooner” considering “the economy is very strong and inflationary pressures are higher.”
            • Several Federal Reserve officials, including Randal Quarles, Raphael Bostic, and Mary Daly, echoed Powell’s comments later in the week indicating that a faster pace of asset purchase reductions may be warranted.
          • Powell also raised eyebrows when he commented that now is a “good time to retire” the oft-used descriptor of current inflationary pressures, “transitory,” arguing that the broader public has taken the word to mean “short-lived” rather than the Fed’s intended meaning that higher inflation today will not necessitate greater inflation on average in the future.
          • Market participants are now eagerly awaiting the next FOMC monetary policy meeting, scheduled for December 14–15, to see if the FOMC does in fact quicken the pace of tapering in light of a weak November jobs report and a nascent omicron variant situation.

                Congress, White House avert government shutdown

                • With a Friday deadline looming, both chambers of Congress passed a short-term funding bill on Thursday that will allow the government to remain open through February 18, 2022.
                  • President Biden signed the bill into law on Friday just hours before the government was set to shut down.
                • Averting a government shutdown is just one of Congress’ top priorities in the final month of the year, and passage of a short-term funding bill opens the door to negotiating two other big priorities — raising or suspending the debt ceiling by December 15 to avoid a U.S. default and negotiating the $1.7 trillion social spending bill, the Build Back Better Act.
                  • Treasury Secretary Yellen has indicated that she expects the government to be in a position to pay its bills through December 15, but that the ability to do so beyond December 15 is questionable, meaning Congress has approximately a week and a half to negotiate either a raise or suspension to the debt ceiling without risking default.
                  • While negotiation of the Build Back Better Act is less time sensitive than the debt ceiling fix, Senate Majority Leader Chuck Schumer has indicated that he is aiming to pass the bill before the Christmas holiday.

                  Interest rates

                  • In an eventful week for market participants, the Treasury curve flattened as short-term rates pushed higher after hawkish comments from Fed Chair Powell, while mid and long-term rates moved lower.
                    • Looking at last week’s moves, the curve, as measured by the 2s/10s basis, flattened over 20 basis points during the week.
                    • The 2s/10s basis is well off its recent high of 1.29% from mid-October and now sits just under 75 basis points.
                  • With Chair Powell and others suggesting a faster taper pace may be warranted, expectations for federal funds rate hikes have pulled forward.
                    • Currently, the market is expecting two hikes in 2022 with the first expected in June 2022, one meeting sooner than the week prior’s expectation, and the second expected in November 2022, also one meeting sooner than the week prior’s expectation.
                    • Market participants won’t have to wait long to find out if the FOMC does change the pace of asset purchase reductions as the FOMC meets again on December 14–15.
                  • In light of the recent flattening of the yield curve, we have seen an increase in both discussions and trading activity around hedging for higher rates as the relative cost to enter into one of these structures has decreased relative to levels seen a few weeks ago.
                    • For context, the negative carry associated with a five-year pay-fixed Fed Funds swap has dropped three basis points over the week to 93 basis points.

                          Commercial and industrial loan growth falls but expected to improve

                          • Commercial and Industrial (C&I) loans fell 4% in aggregate across the banking industry in the third quarter, according to S&P Capital IQ, as PPP loan forgiveness drove balances lower.
                            • Only six of the top 25 banks in the U.S. reported year-over-year growth in C&I balances with some of the largest banks like Bank of America, JPMorgan, Citibank, and Wells Fargo each reporting yearly declines in C&I balances.
                            • While headwinds remain, some institutions are calling for that trend to reverse with the likes of Citizens Bank and U.S. Bank reporting improved loan demand and early signs of a pick-up in C&I loan production.

                                      The look forward

                                      Upcoming economic data releases

                                      • Trade Balance – Tuesday
                                      • Jobless Claims – Thursday
                                      • Wholesale Inventories – Thursday
                                      • Consumer Price Index – Friday
                                      • Consumer Sentiment – Friday

                                      Upcoming Federal Reserve Speakers

                                      • There are no scheduled speaking engagements for Federal Reserve officials this week.

                                            Rates snapshot

                                            Market implied policy path (Overnight indexed swap rates)

                                            Source: Chatham Financial

                                            About the author

                                            • Bill Smith

                                              Associate Director
                                              Balance Sheet Risk Management

                                              Financial Institutions | Kennett Square, PA


                                            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

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