Powell reaffirms commitment to accommodative policy stance
Balance Sheet Risk Management
Financial Institutions | Kennett Square, PA
SummaryDespite the expectation of additional fiscal stimulus and dovish comments from the Federal Reserve chair, the major U.S. equity indices pulled back last week amid weak economic data, rising COVID-19 cases globally, and the continued emergence of new COVID-19 variants.
Prior week summary
Despite the expectation of additional fiscal stimulus and dovish comments from the Federal Reserve Chair, the major U.S. equity indices pulled back last week amid weak economic data, rising COVID-19 cases globally, and the continued emergence of new COVID-19 variants. As of Monday evening, the global tally of COVID-19 cases is approaching 100 million, clocking in at just under 95.8 million cases, with over two million individuals succumbing to the virus worldwide. After the seven-day average of U.S. daily cases had accelerated upward for most of December and the beginning of January, cases have moderated somewhat with the seven-day average of daily cases now sitting at approximately 214,000 cases per day. While cases are declining over the short term, the seven-day average case count as of Monday evening is nearly three times higher than the peak seen over the summer. Contrary to the decline seen in the number of new cases, deaths have unfortunately been on the rise with the seven-day average daily death toll sitting just over 3,300, a pandemic record. Incoming CDC Director, Rochelle Walensky, warned of a rocky road ahead as the winter presses on saying, “By the middle of February, we expect half a million deaths in this country. And we still yet haven’t seen the ramifications of what happened from the holiday travel, from holiday gathering, in terms of high rates of hospitalizations and the deaths thereafter.”
On Thursday, President-elect Joe Biden announced plans for a $1.9 trillion stimulus package, which follows the $2.3 trillion COVID-19 relief and federal spending bill signed into law at year-end. The proposed package includes $1,400 direct payments to qualifying individuals, $440 billion in assistance to businesses, and $415 billion in funds designed to aid in the fight against COVID-19. In an address announcing the proposal, President-elect Biden stressed the need for additional stimulus saying, “We have to act and act now. This is what the economists are telling us. More importantly, it is what the values we hold in our hearts as Americans are telling us. A growing chorus of top economists agree that, in this moment of crisis, with interest rates at historic lows, we cannot afford inaction.” A host of Federal Reserve officials, including Federal Reserve Chair Jerome Powell, spoke this week and in a mostly unified fashion, stated that the central bank does not plan to raise the target range in the near-term and a tapering of asset purchases is not on the horizon. Speaking at a web symposium with Princeton University on Thursday, Chair Powell looked to quell any fears of a pullback in the central bank’s support noting that the state of the U.S. economy is “far from our goals,” and that “We’ll let the world know. We will communicate very clearly to the public and we’ll do so, by the way, well in advance of active consideration of beginning a gradual tapering of asset purchases.”
Market participants were the beneficiaries of a deluge of economic updates over the week that largely pointed to a sluggish U.S. recovery. The December retail sales figure dominated headlines on Friday after it was reported that retail sales declined 0.7% in December, the third straight month of declines. The November figure was also revised lower to -1.4%. Analysts were quick to note that while COVID-19 restrictions played a role in the fewer sales, spending at online retailers also moved lower in a meaningful way. Updates for the manufacturing sector sent conflicting signals. Industrial production surprised significantly to the upside, increasing 1.6% in December, far above consensus expectations calling for a 0.5% increase. The Empire Manufacturing Index didn’t produce as much optimism, logging a 3.5 level in January, well below analyst calls for a 6.0 level and below the 4.9 level seen in December. Inflationary pressures look to have solidified somewhat but remain muted. Wednesday’s release of the Consumer Price Index (CPI) indicated that prices rose 0.4% in December, above analyst expectations and the 0.2% increase seen in November. The Core CPI measure, which notably excludes food and energy prices, rose 0.1% in December, below the 0.2% increase seen in November. The labor market continues to show weakness with 965,000 individuals filing for unemployment in the last week, well above the 784,000 claims filed the week prior and consensus estimates calling for 800,000 claims. Continuing claims also moved higher over the week, with 5.27 million individuals continuing to receive unemployment benefits, approximately 200,000 more individuals than reported the week prior.
The look forward
In a holiday-shortened week, market participants are looking forward to the release of updated figures on jobless claims, housing starts, existing home sales, and the Philadelphia Fed Business Outlook Survey, among others. All eyes will turn to Washington on Wednesday when President-elect Joe Biden is sworn in as the 46th President of the United States.
Market implied policy path (Overnight indexed swap rates)
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.21-0018
Our featured insights
FOMC hikes 75 basis points, signals more to come
In a week dominated by the highly-anticipated September FOMC policy meeting, Treasury yields pushed significantly higher as investors recalibrated their bets for Fed policy action in the near term.
Rising rates have no brakes
Interest rate expectations increase as the Fed votes unanimously to hike the Fed funds rate by 0.75%, while the dollar continues to strengthen in line with recent market trends.
Bank of England continues with a 50 bps rate hike
On 22 September, the Bank of England (BoE) voted five to four to raise the U.K. base rate by 0.50% to 2.25%. The voting committee’s newest member, Swati Dhingra, voted for a lower 0.25% hike while the remaining dissenters voted for a higher 0.75%. While the hike matches the BoE’s largest ever...
Fed remains steadfast to their rate hikes
On Wednesday, September 21, the Federal Open Market Committee (FOMC) voted unanimously to raise the federal funds target range by 75 basis points to 3.00–3.25%. This rate hike is guided by their long-term goal of stabilizing prices while simultaneously ensuring maximum employment. The Fed is...
CFTC releases a Request for Information on climate-related financial risk
In June, the Commodity Futures Trading Commission (CFTC) released a Request for Information (RFI) on climate-related financial risk, and they have recently extended the deadline for comment until October 7. Regulators signal that climate-related issues will remain near the top of their agendas, so we wanted to ensure that our clients and the market were apprised of the RFI and could submit comments.
Hotter-than-expected inflation sends rates higher
The Treasury selloff intensified last week as investors recalibrated their bets for Federal Reserve policy action in the near term after the latest inflation readings showed prices accelerating faster than expected.
August inflation data spurs risk-off sentiment in markets
The latest U.S. CPI reading came in higher than economists expected last Tuesday, leading to sell-offs in equity markets and a resurgence of recessionary fears as the next FOMC meeting approaches.