Strong data propels U.S. equities higher
Prior week summary
Mid- and long-term treasury yields fell further last week with the 10-year Treasury yield falling as low as 1.53% intraday Thursday while the major U.S. equities continued their climb higher, extending gains for the third consecutive week, amid improving macroeconomic fundamentals, dovish comments from several Federal Reserve officials, and a brightening COVID-19 outlook in the U.S.
The 10-year Treasury yield experienced the largest one-day drop since the day after last year’s U.S. presidential election on Thursday, despite strong economic data, as market participants, aided by technical factors, showcased a renewed appetite for Treasury bonds after March’s selloff. Despite the roughly eight basis point decline in the 10-year Treasury yield over the week, the 10-year breakeven inflation rate moved higher, nearing the early-April multi-year high, to approximately 2.37% as market participants reflected an increase in inflation expectations following a slate of upbeat economic data releases. In a virtual event hosted by the Delaware State Chamber of Commerce, Philadelphia Fed President Patrick Harker appeared optimistic about the U.S. economic outlook saying, “While I’m concerned about the downside risks from COVID-19 variants and the alarming virus spikes in states like Michigan, I still think a combination of increased vaccinations, falling COVID-19 case rates, and a huge dose of fiscal stimulus should buoy the national economy,” and outlined his expectations for 2021 GDP growth saying, “For now, I’m expecting GDP growth to come in around 5% to 6% in 2021. I would expect the labor market to parallel GDP growth and unemployment to fall throughout this year.” Harker’s comments reflect similar sentiment offered by Federal Reserve officials who, broadly, have expressed optimism about U.S. 2021 growth prospects, but emphasized that the Federal Reserve will continue to hold an accommodative policy stance as the U.S. economy works its way out of a pandemic-driven recession. Fed Chair Jerome Powell spoke to the Economic Club of Washington D.C. this week and offered some guidance on the timing of a pullback in monthly asset purchases and a move upward in the Federal Funds target range. Speaking on Wednesday, Powell said, “We will reach the time at which we will taper asset purchases when we’ve made substantial further progress toward our goals from last December, when we announced that guidance. That would, in all likelihood, be before, well before, the time we consider raising interest rates. We haven’t voted on that order but that is the sense of the guidance.” Looking at the Fed Funds Effective Rate forward curve, market participants currently expect the FOMC to raise rates for the first time in the second quarter of 2023, despite the majority of FOMC members indicating that rates will likely be on hold through 2023.
Market participants were the beneficiaries of several high-profile economic releases last week that largely signaled a strengthening U.S. economy. Inflation came into focus on Tuesday when the March Consumer Price Index (CPI) release topped expectations as prices increased 0.6% over the month, the largest month over month increase in nearly a decade. While a jump in gasoline prices accounted for roughly half of the increase, the core CPI, which excludes food and energy components, rose 0.3% in March, also above expectations. The CPI release reignited talk of significant inflationary pressures on the horizon, but some analysts argued that the higher year-over-year figure, 2.6% in March, can be mostly attributed to a “low base” given that prices plummeted at the onset of the pandemic one year ago. Two regional manufacturing surveys, the Empire Manufacturing Index and the Philadelphia Fed Business Outlook Survey, topped expectations on Thursday. The increase in both surveys was attributed to increased orders and shipments. Notably, the Philadelphia Fed Business Outlook Survey smashed expectations posting a 50.2 level, the highest level in 48 years. The strong regional surveys come on the heels of the best reading the national ISM Manufacturing Index has seen since 1983 in March. Consumers look to be regaining their footing after a dismal February retail sales report as the March retail sales figure increased 9.8% month over month, well above the 5.8% consensus estimate and the -2.7% contraction seen in February. The strong March figure has been attributed to the stimulus checks delivered as part of the American Rescue Plan Act, a thawing of the cold February weather, and a loosening in COVID-19 restrictions across the country. Lastly, jobless claims set a new pandemic-era low on Thursday reporting 576,000 claims for the week ended April 10. The latest jobless claims release snapped a two-week stretch of increases, while continuing claims remained mostly flat at 3.73 million claims.
In Washington, negotiations heated up on Monday when President Biden held a meeting with a bipartisan group of lawmakers to discuss the infrastructure proposal. Republicans, generally, took issue with the cost of the bill, the proposed corporate tax increase, and the contents of the bill which they argued stretched the definition of “infrastructure.” Republican support seems to materialize when speaking about a skinnier more traditional infrastructure bill, however. Interviewed on Sunday, Republican Senator John Cornyn said, “There is a core infrastructure bill that we could pass with appropriate pay-fors, like roads and bridges and even reaching out to broadband, which this pandemic has exposed a great digital divide in this country. I think we could agree to that. But I think that’s the part we would agree on. So let’s do it and leave the rest for another day and another fight.” President Biden is scheduled to hold another meeting with a bipartisan group of lawmakers on Monday.
The look forward
In a light week for economic data releases, market participants are looking forward to the release of updated figures on jobless claims, the Conference Board US Leading Index, and new and existing home sales, among others.
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.21-0100
Our featured insights
Treasury yields rise to end Q3
In a week of heightened volatility, Treasury yields, particularly at the long end, moved moderately higher as market participants endured a busy week digesting commentary from a slew of Federal Reserve officials, the U.K. central bank’s emergency intervention in the U.K. Gilt market, and the...
Emergency Bank of England intervention tempers sterling’s nosedive, UK changes course on tax cuts
The Bank of England was forced to take emergency action last week after the pound depreciated to its lowest levels in over 35 years. In response, the government also changed its tune, reversing course on sweeping tax cuts across the U.K. In Europe, inflation readings reached all-time highs as the...
FOMC hikes 75 basis points, signals more to come
In a week dominated by the highly-anticipated September FOMC policy meeting, Treasury yields pushed significantly higher as investors recalibrated their bets for Fed policy action in the near term.
Rising rates have no brakes
Interest rate expectations increase as the Fed votes unanimously to hike the Fed funds rate by 0.75%, while the dollar continues to strengthen in line with recent market trends.
Bank of England continues with a 50 bps rate hike
On 22 September, the Bank of England (BoE) voted five to four to raise the U.K. base rate by 0.50% to 2.25%. The voting committee’s newest member, Swati Dhingra, voted for a lower 0.25% hike while the remaining dissenters voted for a higher 0.75%. While the hike matches the BoE’s largest ever...
Fed remains steadfast to their rate hikes
On Wednesday, September 21, the Federal Open Market Committee (FOMC) voted unanimously to raise the federal funds target range by 75 basis points to 3.00–3.25%. This rate hike is guided by their long-term goal of stabilizing prices while simultaneously ensuring maximum employment. The Fed is...
CFTC releases a Request for Information on climate-related financial risk
In June, the Commodity Futures Trading Commission (CFTC) released a Request for Information (RFI) on climate-related financial risk, and they have recently extended the deadline for comment until October 7. Regulators signal that climate-related issues will remain near the top of their agendas, so we wanted to ensure that our clients and the market were apprised of the RFI and could submit comments.