Powell sticks to script at Jackson Hole; ARRC updates Term SOFR derivative guidance
- August 30, 2021
Balance Sheet Risk Management
Financial Institutions | Kennett Square, PA
Prior week summary
In an eventful week, the major U.S. equity indices and long-term treasury yields moved higher as investors digested Fed Chair Powell’s Jackson Hole comments, mixed economic data, and the continued spread of the COVID-19 delta variant. After experiencing significant volatility in recent weeks, the 10-year Treasury yield moved only modestly over the last two weeks with the benchmark yield ending the week at 1.31%, roughly five basis points higher than where it began the week. Several high-profile pieces of economic data were released during the week with housing-related data commanding investor’s attention at the start of the week. Existing home sales increased 2% in July, defying expectations for a 0.5% decline. Of note, three of the four U.S. regions reported sales increases in July with the Midwest leading the pack. New home sales also rose in July to a 708,000 annualized pace, marking the first increase in four months as an increase in housing supply helped drive sales. The second estimate for second-quarter GDP fell modestly below expectations after the release indicated that the U.S. economy expanded at a 6.6% annualized pace in the second quarter. Looking ahead, the Atlanta Fed’s GDPNow tool, which attempts to forecast the current quarter’s GDP in real-time, is now forecasting the U.S. economy to expand at a slower but still robust 5.1% annualized pace in the third quarter. Finally, the labor market continues to show improvement with unemployment claims for the week of August 21 totaling 353,000 claims, a slight uptick from the week prior but near the pandemic-era low of 349,000 claims.
Although economic data releases were in plentiful supply last week, market participants turned their attention to the annual Jackson Hole Economic Symposium at the end of the week with Federal Reserve Chair Jerome Powell’s Friday morning speech garnering significant media attention. In a highly anticipated speech, Powell indicated that it could be appropriate to begin tapering the $120 billion-per-month asset purchase program by the end of this year should the U.S. economy continue to evolve broadly in line with the FOMC’s expectations, a view that many Federal Reserve officials have expressed in recent weeks. While Powell fell short of announcing a launch of the tapering program, some analysts have suggested that such an announcement may come as early as the next FOMC meeting in September as Federal officials continue to signal the possibility for purchase reductions before year-end. In a comment consistent with the minutes from the latest FOMC meeting, Powell reiterated that the tapering timeline does not implicitly forecast a timeline for hikes to the federal funds rate saying, “The timing and pace of the coming reduction in asset purchases will not be intended to carry a direct signal regarding the timing of interest rate liftoff, for which we have articulated a different and substantially more stringent test.” The FOMC will meet for the next monetary policy meeting on September 21–22.
On Friday, the Alternative Reference Rates Committee (ARRC) released updated guidance “on best practice recommendations related to the scope of use of the Term Rate.” When the ARRC formally endorsed the CME Group’s SOFR Term Rate in late July, the associated guidance recommended that only derivatives hedging an end user’s exposure to a SOFR Term Rate cash product be permitted. The limited endorsement raised questions about the permissibility of a financial institution entering into an equal and offsetting hedge with a dealer bank when hedging SOFR Term Rate derivatives offered to their customers. For more detail on how the ARRC addressed the market’s concern, please see our recent publication.
The look forward
Market participants are gearing up for a busy week of economic data releases with updated figures on the Conference Board Consumer Confidence Index, ADP employment report, the ISM Manufacturing and Services Indices, factory orders, durable goods orders, jobless claims, and most notably, the August nonfarm payroll report dotting the economic calendar.
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.21-0232
Our featured insights
Hawkish FOMC meeting sends yields higher
In yet another eventful week, the major U.S. equity indices ended flat to modestly higher while Treasury yields saw significant increases on the back of strong economic data and a hawkish FOMC meeting.
Debt ceiling talks take center stage in Washington
The major U.S. equity indices moved lower for the second consecutive week and long-term Treasury yields increased modestly as market participants digested the latest inflation readings, political wrangling on Capitol Hill, and the continued spread of the COVID-19 delta variant.
U.S. real estate and capital markets update Q3 2021
As we wind down on summer 2021, many Americans are returning to the office and sending their children back to school. We recently reviewed the effects of COVID-19 on the U.S. economy and takeaways for the real estate market during our semiannual market update webinar. On September 15,...
European real estate and capital markets update Q3 2021
It’s back-to-school month for most children, and back to the office for an increasing number of workers too. What better time to host our semiannual market update webinar for real estate? On 15 September, participants listened to our experts, Adrian Ng and Jamie Macdonald, provide an overview of...
Supply chain disruptions send prices higher
In a holiday-shortened week, the major U.S. equity indices moved lower while long-term Treasury yields ticked modestly higher as signs of firming inflationary pressures, hawkish comments from Federal Reserve officials, and the latest legislative developments in Washington dominated headlines and investors’ attention.
August employment report misses expectations
In the lead-up to the holiday weekend, the major U.S. equity indices ended the week mixed with the S&P 500 and Nasdaq Composite Index setting new intraday highs as market participants dissected the latest economic data, most notably the August nonfarm payroll report, and comments from Federal Reserve officials.
Enhance yield with swaps
Excess liquidity in the financial system creates challenges for financial institutions. Balance sheets demonstrate greater sensitivity to short-term rates and NIM compresses.
Fed minutes highlight taper talk
The major U.S. equity indices moved lower for the week, falling from all-time highs, as market participants digested mostly weaker-than-expected economic data, the continued spread of the COVID-19 delta variant, and the minutes of the latest FOMC meeting.