Senate stimulus bill fails to pass
- September 14, 2020
Balance Sheet Risk Management
Financial Institutions | Kennett Square, PA
SummaryWhile economic data releases for the week were light, market participants received updates on the labor market as well as the latest readings on inflation.
Prior week summary
In a holiday-shortened week, the major U.S. equity indices moved lower for a second consecutive week as the tech sell-off continued amid mixed economic data and stalled stimulus bill negotiations on Capitol Hill. While economic data releases for the week were light, market participants received updates on the labor market as well as the latest readings on inflation. The initial jobless claims reading showed 884,000 individuals filed for unemployment in the last week, topping expectations and suggesting that the labor market recovery may be showing signs of slowing as jobless claims have not only remained well above pre-pandemic norms but also have trended upward in the last four weeks. Continuing claims increased for the first time in five weeks last week and now stands at 13.39 million individuals. Inflation data was released in the form of the Producer Price Index and the Consumer Price Index (CPI) last week, both of which suggested that inflationary pressures remain muted. Producer prices rose 0.3% in August, half of the month over month increase seen in July but modestly above expectations calling for a 0.2% increase. The increase in the August reading was largely driven by the 0.5% increase in the index of services. On the consumer price front, the CPI increased 0.4% in August, below July’s 0.6% reading but above analyst calls for a 0.3% increase. While Friday’s CPI release marks the third consecutive month that the reading has increased, inflation remains very low with prices rising 1.3% year over year. Prices had been rising at a 2.5% year over year pace at the start of the year as measured by the CPI.
Stimulus bill negotiations continued to falter last week as Republicans and Democrats worked to reach a compromise on a bill that would provide additional aid to both individuals and companies hardest hit by the pandemic. In an attempt to break the impasse, Senate Republicans introduced a “skinny” $500B relief bill that looked to extend enhanced unemployment benefits of $300 per week and provide an additional $257B to the Paycheck Protection Program. The bill failed to pass on Thursday after receiving only 52 of the 60 votes needed to pass. Speaking to reporters on Friday, Senate Majority Leader appeared pessimistic about the prospects of a compromise on additional relief saying, “I can’t predict we are going to get together here in these last two months before the election. I wish I could tell you we were going to get another package, but it doesn’t look good right now.” White House economic advisor Larry Kudlow was more optimistic saying that, “We compromised last winter. We should be able to do it again.”
As of Sunday evening, the global case tally stands at just over 29.2 million confirmed COVID-19 cases with over 900,000 individuals succumbing to the virus. In the U.S., 6.7 million individuals have been confirmed to have contracted COVID-19, roughly a quarter of the world tally. The U.S. has seen steadily decreasing rates of infection and hospitalization averaging approximately 35,500 new cases per day in the last week, far below the record-setting figures seen in July that approached 80,000 individuals per day. Market participants received a surprise update on Tuesday that AstraZeneca was halting clinical trials of its promising COVID-19 vaccine after a neurological illness was discovered in one of the study participants. The halt in trials dampened investor sentiment midweek as the prospective vaccine is regarded as one of the most promising COVID-19 vaccine candidates and is also one of the vaccines farthest along in testing. Sentiment received a boost late last week however, after it was determined that the illness in the study participant was not a result of the vaccine trial, and Phase III testing was expected to resume.
The look forward
Market participants are gearing up for a busy week of economic data releases as updated figures on the Empire Manufacturing Index, industrial production, retail sales, jobless claims, housing starts, and the Philadelphia Fed Business Outlook Survey, among others, dot the economic calendar. The FOMC holds its two-day policy meeting on Tuesday and Wednesday of this week.
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.20-0360
Our featured insights
Equities shake off virus jitters; ARRC talks Term SOFR
Despite a sharp selloff to start the week, the three major U.S. equity indices recovered to finish the week higher, each setting new all-time highs, as market participants focused on a strong start to the corporate earnings season and shrugged off mostly weaker-than-expected economic data and renewed fears of the COVID-19 delta variant.
Inflation readings top expectations
The major U.S. equity indices moved lower for the week, snapping a three-week winning streak, as investors turned their attention to a slew of economic data updates and Federal Reserve Chair Powell’s semi-annual testimonies before Congress.
Regulators voice support for SOFR
Despite the recent rise in COVID-19 cases linked to the delta variant and weaker-than-expected economic data, the major U.S. equity indices extended their run last week, setting new all-time highs, while long-term Treasury yields continued their drift lower, falling to multi-month lows.
June payroll report tops expectations
The major U.S. equity indices continued their march higher last week with the S&P 500 and Nasdaq Composite Indices ending the week at all-time highs as generally favorable economic data outweighed concerns of a new surge of COVID-19 delta variant cases in the U.S.
Big banks pass stress tests
The major U.S. equity indices moved higher over the week with the S&P 500 and Nasdaq Composite Indices reaching new all-time highs amid a breakthrough in infrastructure negotiations, mixed economic data, and sustained improvement in the COVID-19 situation in the U.S.
FOMC Dots turn heads
The major U.S. equity indices ended the week lower as weaker-than-expected economic data and a more hawkish-than-expected FOMC monetary policy meeting dominated headlines and dampened investor sentiment.
Yields fall, ARRC launches “SOFR first” initiative
The major U.S. equity indices ended the week mixed with the tech-heavy Nasdaq Composite Index faring the best as updates to the Consumer Price Index and infrastructure bill negotiations in Washington dominated headlines in a week with few economic data updates and a speaking engagement blackout for Federal Reserve officials.
Increase lending capacity
Many financial institutions have excess liquidity due to the global pandemic and resulting economic stimulus. Management can deploy this liquidity into new loan originations or the investment portfolio. Although bond returns are better than cash, a more attractive return may be provided from mortgage loans.