Rates drop as market reacts to Fed taper discussions and Delta variant concerns
Minutes from the Federal Reserve July policy meeting showed talk of reducing bond purchases by the end of 2021. The COVID Delta variant continues to drive concern, with the Biden administration officially recommending booster shots for fully vaccinated individuals.
Federal Reserve minutes released on Wednesday showed a majority of Federal Reserve officials “judged that it could be appropriate to start reducing the pace of asset purchases this year.” Other officials indicated early 2022 as the best time to begin tapering. Markets reacted with concern for slowing growth amidst mixed economic data. On Friday, Dallas Fed President Rob Kaplan said he is “watching very carefully” how the Delta variant will impact the U.S. economy. Just last week, Kaplan stated support of tapering beginning in October, but he indicated willingness to change his views on policy if economic growth slows.
On Wednesday, top U.S. health officials confirmed booster shots will be offered to all Americans beginning next month. The Biden administration released its plan for booster shots amidst pushback from World Health Organization officials. COVID cases continue to rise across the country as the Delta variant weighs on markets.
Treasury yields fell throughout the back-half of the week, as global COVID concerns have increased risk aversion in the market. The 10-year treasury yield dropped 3-4 basis points last week and is 10 bps lower over the last 10 days. As rates fall, corporates continue to hedge their long-term exposure of future fixed-rate debt issuances, taking advantage of the current market to lock in lower long-term rates.
(Related insight: Read “Managing interest rate risk on future debt issuances.”)
The U.S. dollar had a strong week, with the U.S. dollar currency index rising to its highest level since November 2020. Global concerns for a delayed economic recovery amidst the Delta variant have brought the safe-haven dollar higher. Meanwhile, other currencies fell, as CAD dropped to a six-month low amidst plunging oil prices, while AUD and NZD were down near nine-month lows.
(Related insight: Read “Six key steps to implementing an operational FX program”)
West Texas Intermediate (WTI) crude futures fell to its lowest level since May amidst fears of slowing demand and a strong U.S. dollar. After a strong start to the summer, buoyed by a surge in demand coupled with producers capping supplies, oil has fallen more than 18% from its July 6 high of $76.98. Concern for the spread of the Delta variant tamped down market demand through the back half of the summer. A strong U.S. dollar also contributed to lower oil prices, with dollar-denominated oil becoming more expensive for foreign purchasers.
All eyes will be on the Jackson Hole Economic Policy Symposium, scheduled to begin on Thursday. Fed Chair Jerome Powell will give a virtual speech on Friday at 10 a.m. ET. Consumer spending and core PCE price index numbers will also be released on Friday.
Subscribe to receive our market insights and webinar invites
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.21-0228
Our featured insights
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...
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...
Labor market remains stoic as U.S. inflation slows, dollar weakens
The Federal Reserve appears to be in control of inflation after the most recent consumer price index report. Questions linger regarding future rate increases and the subsequent impact on the labor market. The dollar continues its march down from last year’s highs.
2023 corporate treasury trends
Corporate treasury and accounting teams face a daunting list of concerns as they plan for 2023. Inflation at multi-decade highs, a war in Europe for the first time in 75 years, global central bank tightening, a roller coaster ride in on equity prices, and recession fears all pose challenges to...
U.S. jobs market remains strong, nonfarm payrolls data suggest slowing inflation
December payrolls surpassed expectations Friday morning as the U.S. added 223,000 jobs to the economy. While the labor market remains strong, investors noted that wage inflation appears to be easing. On the commodity front, oil and natural gas markets lagged to start the year due to global demand...
Markets mixed as focus turns to 2023
Markets were largely quiet around the holidays, with strength in the jobs market and signs of reduced inflation helping to provide some risk-on sentiment. At the same time, the rise in COVID cases in China put downward pressure on demand forecasts for next year.
The market is fighting the Fed yet again
After inflation, retail sales, empire manufacturing, and the Philadelphia Fed business outlook all came in below estimates last week, the market — as evidenced by Treasuries and forward curves — broadly disagrees with the Fed’s interest rate outlook.
7 ways to maximize FX and commodity hedging impact while minimizing costs
Hedge program costs can range from forward points, to trading costs, to fixed and variable operational costs that include systems and personnel. Program benefits often include risk reduction, operational ease, and favorable accounting treatment. This article will address leading practices and...