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Market Update

Q3 GDP slows, social infrastructure bill negotiations heat up

November 1, 2021
  • william smith headshot


    Bill Smith

    Associate Director
    Balance Sheet Risk Management

    Financial Institutions | Kennett Square, PA


The major U.S. equity indices continued their weekslong run-up last week, each ending the month at all-time highs. Treasury yields across the curve pulled back, as investors digested the busiest week of Q3 earnings releases, mixed economic data, and the latest spending bill developments in Washington.

Economic data

  • With Federal Reserve officials in the weeklong blackout period before the next FOMC monetary policy meeting, market participants turned their attention to the week’s economic data releases.
  • After the Empire Manufacturing Index and the Philadelphia Fed Business Outlook Survey reported a pullback in activity earlier in October, the regional Dallas and Richmond manufacturing indices each reported a pickup in activity for October.
    • New orders for both indices moved higher while backlogs remained elevated.
    • Both Dallas and Richmond reported declines in the prices paid component and increases in the prices received component suggesting that manufacturers have been successful in passing some of the raw materials price increases off to customers.
    • Supply chain issues continued to cause disruptions in October, with the Dallas manufacturing measure reporting a month-over-month increase in unfilled orders and delivery times and depressed levels of shipments.
    • The national ISM Manufacturing Index is scheduled for release on Monday, November 1.
  • After rising 6.7% in the second quarter, the advance estimate of third-quarter GDP indicated that the U.S. economy expanded at a 2% annualized pace in the third quarter, far below the 2.6% consensus estimate.
    • Personal consumption fell significantly in the third quarter according to the Commerce Department release.
    • Semiconductor shortages partially explained the pullback with motor vehicle production falling an annualized 41.6% in the third quarter.
      • While motor executives have indicated that they expect semiconductor shortages will resolve in the long term, many have expressed an expectation that the shortages will persist well into 2022.
      • Early indicators suggest that fourth-quarter GDP will come in stronger than the third quarter.
        • The Atlanta Fed’s GDPNow tool, which attempts to forecast the current quarter’s GDP in real-time, currently forecasts that the U.S. economy will expand at a 6.6% annualized pace in the fourth quarter.

    Capitol Hill

    • Negotiations among Democrats continued in earnest last week as the party attempts to come to an agreement on a social infrastructure bill.
    • After initially outlining a $3.5 trillion package, President Biden unveiled a $1.75 trillion framework on Thursday after Senators Joe Manchin and Kyrsten Sinema, two critical votes needed to pass the measure via budget reconciliation, expressed support for a slimmer package in recent weeks.
      • While President Biden indicated that he is, “confident this framework will win the vote of every Democratic Senator,” it remains unclear if either Manchin or Sinema will vote for the package.
      • A few notable items included in the proposal are universal pre-school, a one-year extension of the expanded Child Tax Credit, expanded clean-energy tax credits, and child-care subsidies.
    • Negotiations have continued through this weekend and House Democrats are eyeing a Tuesday vote on both the $1.75 trillion social spending bill and the $1 trillion bipartisan infrastructure package.

    Interest rates

    • After steepening considerably between late September and early October, the Treasury curve has flattened recently with the 2s/10s spread falling approximately 10 basis points over the week to 1.07%, roughly 22 basis points lower than the recent high of 1.29% seen on October 11.
    • Commensurate with the 11-basis point decline in the 10-year Treasury yield, the 10-year breakeven inflation rate declined roughly 12 basis points to 2.61%.
      • While the 10-year breakeven inflation rate declined over the week, it currently sits only eight basis points lower than the 15-year high set on Tuesday.
    • While we saw a modest decline in mid and long-term Treasury yields last week, expectations for Fed rate hikes have pulled forward in the last two weeks from September 2022 to July 2022.
    • The pick-up in mid-term rates has increased the relative compensation of executing receive-fixed interest rate swaps.
      • To that end, we have seen a significant pickup in both inquiries and executions on our trading desk in the last two weeks.
      • Depending on the index, there is approximately 68–77 basis points of initial positive carry at the three-year point or said another way, roughly three 25 basis point rate hikes of cushion.
    • All eyes will turn to the FOMC on Tuesday and Wednesday of next week with market participants expecting the FOMC to announce a timeline for asset purchase reductions.

      Q3 bank earnings recap

      • Many financial institutions in the U.S. have reported third-quarter earnings in the last few weeks.
      • In aggregate, U.S. financial institutions have reported positive earnings surprises and have expressed optimism about loan growth in the coming quarters.
        • According to S&P Capital IQ, of the 15 banks over $100 billion in assets that reported earnings in mid-October, 13 of those institutions have reported double-digit yearly EPS growth.
          • While many factors, including the recent steepening of the yield curve, can be attributed to last quarter’s EPS growth, credit loss reserve releases and efficiency initiatives have been cited as primary drivers of EPS growth.
        • Regional banks also posted strong Q3 results with over 80% of public institutions in the $10–$100 billion space reporting yearly EPS growth.

        The look forward

        Upcoming economic data releases

        • Markit U.S. Manufacturing PMI – Monday
        • Construction Spending – Monday
        • ISM Manufacturing Index – Monday
        • ADP Employment Report – Wednesday
        • ISM Services Index – Wednesday
        • Factory Orders – Wednesday
        • Durable Goods Orders – Wednesday
        • FOMC Rate Decision - Wednesday
        • Jobless Claims – Thursday
        • October Non-Farm Payroll Report – Friday

          Upcoming Federal Reserve Speakers

          • Federal Reserve Chair Jerome Powell will speak at the conclusion of the FOMC monetary policy meeting on Wednesday at 2:30 p.m. EDT.

            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


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