Powell discusses state of economy following latest FOMC meeting
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Corporates | Denver, CO
Following last week’s FOMC meeting, Fed Chair Jerome Powell signaled progress towards tapering while downplaying the impact of risks including the delta variant on the overall U.S. economic recovery. Markets reacted as U.S. GDP growth for the second quarter of 2021 missed the mark.
Moving towards tapering
July 2021 concluded with headlines of heat waves and talks of tapering following last week’s FOMC meeting. While current asset purchasing levels remain intact, the Fed could announce formal policy changes in the months to come as Powell indicated the Fed is seeing significant progress towards its goals for a full economic recovery. While Powell largely dismissed the notion that the Fed would start tapering purchases of its mortgage-backed securities earlier than Treasuries, he indicated that the rate of tapering is still being evaluated. In addition to the tapering talks, the Fed announced it would introduce two new repurchase agreement (“repo”) facilities in order to encourage additional bank participation and add liquidity to repo markets.
Despite significant recovery across several industries hit hard by the pandemic, investors expressed concern around the ability of the U.S. economy to handle pressures associated with the spread of the delta variant and rising inflation. While acknowledging the increase in COVID cases nationwide, Powell emphasized, “…there has tended to be less in the way of economic implications from each wave.” Additionally, Powell noted that, while inflation is likely to stay above the Fed’s target in the near term, the Fed still sees the rise in prices as transitory. Investors expressed additional concerns after the U.S. Bureau of Economic Analysis released the latest U.S. GDP data on Thursday morning. Despite surpassing pre-pandemic levels for the first time, GDP grew at an annualized rate of 6.5% for the second quarter of 2021, falling significantly short of market forecasts of 8.5%. Spending on personal consumption and nondurable goods increased as vaccinated Americans started to travel and participate in recreational activities again, while residential fixed investment declined approximately 9.8% during Q2.
(Related insight: Watch the on-demand webinar, “Semiannual Market Update for Corporations” with Amol Dhargalkar and Kevin Jones)
Interest rates & LIBOR transition
While expressing optimism in the progress of the U.S. economic recovery, the Fed announced it would maintain its course in holding interest rates at current near-zero levels. Treasury yields dipped slightly Thursday morning upon release of the GDP data before rebounding in the afternoon, with the 10-year Treasury closing at 1.269%.
Earlier in the week, U.S. regulators started requiring swap desks to execute inter-dealer derivate transactions tied to the Secured Overnight Financing Rate (SOFR) instead of the London Interbank Offered Rate (LIBOR). This move is expected to add significant liquidity to the SOFR derivatives market and stimulate additional SOFR lending going forward.
Based on our experience partnering with clients on LIBOR transition initiatives, the market shift towards SOFR lending may be an important catalyst to jumpstarting the SOFR derivatives market. Treasury teams can actively monitor changes in SOFR and Average SOFR rates, as well as forward curves for SOFR relative to various LIBOR tenors at ChathamRates.com.
(Related insight: Read “SOFR: A comprehensive guide”)
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Foreign currencies and commodities
USD weakening continued in response to the latest FOMC meeting and GDP numbers, as the dollar index fell to a one-month low of 91.98% on Thursday. Meanwhile, oil prices rose on Thursday as new data from the U.S. Energy Information Administration indicated further tightening of supply, with Brent oil futures closing at $76.05 per barrel.
(Related insight: Read “Six key steps to implementing an operational FX program”)
Cryptocurrency made its way into recent headlines as bitcoin rose to $40,278 last Monday, marking a six-week high. Additionally, the U.S. Senate Banking Committee met with industry experts last week for a detailed discussion on the impacts of cryptocurrency in today’s financial markets.
Investors continue to assess the state of the U.S. economic recovery and the impact of the delta variant. The focus this week turns to employment data as the Bureau of Labor Statistics will release July nonfarm payroll information on Friday, August 6.
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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.21-0210
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