President Biden speaks with President Xi; Inflation remains muted
Balance Sheet Risk Management
Financial Institutions | Kennett Square, PA
SummaryThe major U.S. equity indices touched new highs last week as stimulus bill optimism, sustained decline in COVID-19 cases, sustained increase in COVID-19 vaccinations, and dovish comments from the Federal Reserve Chair buoyed investor sentiment and drove equity prices higher.
Prior week summary
The major U.S. equity indices touched new highs last week as stimulus bill optimism, sustained decline in COVID-19 cases, sustained increase in COVID-19 vaccinations, and dovish comments from the Federal Reserve Chair buoyed investor sentiment and drove equity prices higher. After leaders of the Democratic Party moved forward with plans to pass President Biden’s proposed COVID-19 relief package via budget reconciliation the week prior, work continued last week as the relevant committees drafted their piece of legislation that plans to be rolled up into a single $1.9 trillion relief package. With the March 14 expiration of jobless benefits for many Americans looming, House Speaker Nancy Pelosi is aiming for passage of a relief package by the end of this month. Keeping with that timeline, several House Committees acted swiftly last week and advanced their portion of the $1.9 trillion relief package. Notably, the Ways and Means Committee advanced legislation on Thursday that would send $1,400 direct payments to most Americans, extend enhanced unemployment benefits through August, and award families up to $3,600 per child. Many market participants have been encouraged by the size of the proposed bill, over twice as large as the $900 billion relief bill passed in December, but remain wary of pitfalls as the Democrats can’t afford to lose a single Democrat vote given that the Senate is split 50-50 with Vice President Kamala Harris holding the tie-breaking vote. In remarks delivered on Thursday, Speaker Pelosi outlined the envisioned timeline for passage of the package saying, “We hope to finish our markups in committee this week and then send it to the Budget Committee next week for them to work their will on it, then to the Rules Committee, and then to the Floor. We hope to have this all done by the end of February, certainly on the President's desk in time to offset the March 14 deadline where some unemployment benefits will expire.”
Elsewhere in Washington, President Biden held his inaugural call with Chinese President Xi Jinping on Wednesday evening. According to the White House's readout of the call, President Biden took issue with and pressed President Xi on China’s, “coercive and unfair economic practices, crackdown in Hong Kong, human rights abuses in Xinjiang and increasingly assertive actions in the region, including toward Taiwan.” The Biden administration has expressed the need to keep the pressure on Beijing in recent weeks and tariffs placed on Chinese goods by the Trump administration remain in place.
COVID-19 cases continued to decline in the U.S. last week with the seven-day average daily case count falling to 86,964 cases on Monday compared to the 111,131 seven-day average observed last Monday. Notably, deaths and hospitalization remain on the decline while vaccinations continue to pick up steam. As of Sunday, 52.88 million Americans have received a shot of one of the COVID-19 vaccinations authorized for emergency use with approximately 2.25 million Americans receiving a shot on Sunday alone. Vaccinations have risen approximately 28% over the week with nearly 12% of the U.S. population receiving at least a single shot. Director of the National Institute of Allergy and Infectious Diseases Dr. Anthony Fauci has expressed optimism over the rollout of vaccines recently, but cautioned that COVID-19 variants may pose effectiveness issues with the existing vaccines. Speaking to NBC’s “Meet the Press” on Sunday, Dr. Fauci said, “But we do know that it (the South Africa variant) evades the protection from some of the monoclonal antibodies, and it diminishes somewhat the capability and the effectiveness of the vaccine to block it. It doesn’t eliminate it, but it diminishes it by multiple fold.”
In a light week for economic data releases, market participants turned their attention to the inflation outlook, as well as the employment situation. Wednesday’s release of the Consumer Price Index (CPI) indicated that consumer prices rose 0.3% in January, driven primarily by an uptick in energy prices. Inflation appears to remain muted with the CPI rising 1.4% year over year. While the increase in the headline figure was in line with expectations, the Core CPI, which excludes the more volatile food and energy components, fell below expectations and remained unchanged from the month prior. Jobless claims ticked lower last week to 793,000 claims, but only because the week prior’s reading was adjusted upward from 779,000 to 812,000 claims. Continuing claims remained on a downward trend as 4.55 million individuals continued to receive unemployment benefits last week compared to the 4.69 million individuals reported the week prior.
Speaking to the Economic Club of New York on Wednesday, Federal Reserve Chair Jerome Powell painted a dark picture of the employment situation and suggested that the real unemployment rate is far higher than that reported by the Bureau of Labor and Statistics (BLS) saying, “The BLS reports that many unemployed individuals have been misclassified as employed. Correcting this misclassification and counting those who have left the labor force since last February as unemployed would boost the unemployment rate to close to 10 percent in January.” With this in mind, Chair Powell reiterated the Federal Reserve’s commitment to supporting the U.S. economy through the pandemic and called for continued support from the U.S. government saying, “Fully realizing the benefits of a strong labor market will take continued support from both near-term policy and longer-run investments so that all those seeking jobs have the skills and opportunities that will enable them to contribute to, and share in, the benefits of prosperity,” and noted, “Given the number of people who have lost their jobs and the likelihood that some will struggle to find work in the post-pandemic economy, achieving and sustaining maximum employment will require more than supportive monetary policy. It will require a society-wide commitment, with contributions from across government and the private sector.”
The look forward
In a busy week for economic data releases, market participants will be looking forward to updated figures on the Empire Manufacturing Index, retail sales, industrial production, jobless claims, housing starts, the Philadelphia Fed Business Outlook Survey, and existing home sales, among others. The minutes of the FOMC’s January policy meeting will be released on Wednesday.
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.21-0043
Our featured insights
Back-to-Back Swap Program Benchmark Statistics Report
Our back-to-back swap benchmark report compares customer swap transactions across years, regions, and bank asset size. While your financial institution may not yet be using swaps to win more commercial loan business, you can still find value in reviewing this report.
GDP, PCE take steps in the right direction ahead of Fed meeting, China’s reopening leads to commodities shift
December metrics for GDP and inflation came in at promising levels, keeping market expectations consistent ahead of this week’s FOMC meeting. China’s reopening leads to increased economic activity, including increased demand for metals and oil, while natural gas struggles due to unexpectedly warm...
Q4 GDP slows, funding pressures intensify
After falling for much of January, Treasury yields rebounded modestly last week as investors digested weak economic data and a slew of corporate earnings reports and awaited the early February FOMC monetary policy meeting.
Answers to five key questions as you prepare for LIBOR cessation and the fall back to SOFR
With 2023 and the cessation of LIBOR officially upon us, some companies are opting to let their debt and interest rate hedges “fall back” through the adoption of standard language. While it might appear that this is the most straightforward way to manage the transition, there are five main...
Weak retail sales report sours sentiment and sends yields lower
In a holiday-shortened week, Treasury yields notched their third-consecutive week of declines as investors digested weaker-than-expected economic data coupled with the Bank of Japan’s continued commitment to yield curve control.
Retail sales, producer price data suggest cooling economic activity
Markets responded positively to declining PPI and retail sales figures, suggesting that U.S. economic activity, and notably inflation, is slowing. Investors are pointing to the data as another piece of evidence that the Federal Reserve will be able to soften its hawkish stance on rate tightening...
Cool CPI report drives rates lower
In the first full trading week of the year, Treasuries and the major U.S. equity indices advanced as market participants welcomed signs of easing price pressures and a less aggressive Federal Reserve.
Q4 2022 Business Plan Assumptions
Chatham’s social housing team set out below its Q4 2022 business plan assumptions for housing associations and an accompanying economic commentary. Following a tumultuous third quarter in the Sterling markets, a new government and reverse of the “mini” budget induced a much-needed calm after the...