Supply chain disruptions send prices higher
- September 13, 2021
Balance Sheet Risk Management
Financial Institutions | Kennett Square, PA
Prior week summary
In a holiday-shortened week, the major U.S. equity indices moved lower while long-term Treasury yields ticked modestly higher as signs of firming inflationary pressures, hawkish comments from Federal Reserve officials, and the latest legislative developments in Washington dominated headlines and investors’ attention. After a two-week deluge of economic data updates, last week’s economic calendar was far lighter by comparison with Friday’s Producer Price Index (PPI) release topping the bill and garnering the most attention from market participants. Supply chain distributions featured yet again in the latest PPI release which indicated that wholesale prices rose 0.7% in August bringing the yearly increase to a robust 8.3%, the highest reading in the series history. While food and energy prices have been pushing the headline figure higher, the core PPI release, which excludes the food and energy components, rose a still-strong 0.3% in August and 6.3% from a year earlier. The same supply chain issues that have caused a run-up in consumer and producer prices since the start of the year have caused businesses around the country much consternation with the Federal Reserve’s latest Beige Book, released Wednesday, highlighting that, “businesses in most Districts remained optimistic about near-term prospects, though there continued to be widespread concern about ongoing supply disruptions and resource shortages.” While the delta variant and supply chain disruptions have constrained more robust economic growth in the U.S., Federal Reserve officials appear keen to launch a campaign of asset purchase reductions sooner rather than later with several officials commenting during the week that they expect the tapering program to launch before year-end. Robert Kaplan, President of the Federal Reserve Bank of Dallas, turned heads when he argued in favor of a campaign launch as early as October at a virtual event midweek, saying, “I don’t see a fundamental change to the outlook. If I get to the meeting and continue to feel that way, I’d be advocating that we should announce a plan in the September meeting and begin shortly thereafter, maybe in October.” The next FOMC meeting is scheduled for later this month on September 21-22.
Negotiations continued on Capitol Hill last week as Congress worked to pin down the details of a social spending package that could total as high as $3.5 trillion. Democrats plan to attempt to pass the $3.5 trillion plan through a budget reconciliation process, a maneuver that would allow passage of the bill without Republican support. Senator Joe Manchin, typically characterized as a moderate Democrat and a vote which the Democrats need to secure in order to pass the package, indicated Sunday that he does not support a package with a price tag of $3.5 trillion and instead expressed support for a package closer to $1.5 trillion arguing that, “The emergency to do something in the next week is not there. We’ve done $5.4 trillion over the last year and about a year and a half. A lot of that money is still going out the door.” House Speaker Nancy Pelosi has expressed a desire to pass the Senate infrastructure bill by late September with a vote on the budget reconciliation bill coming shortly after the infrastructure vote.
Scrutiny of credit-sensitive alternatives to LIBOR, such as BSBY and AMERIBOR, continued last week when the Board of the International Organization of Securities Commissions seconded remarks made by the Financial Stability Board earlier this summer and reiterated, “the importance of continued transition to robust alternative financial benchmarks, i.e. Risk-Free Rates, to mitigate potential risks arising from the cessation of LIBOR, including USD LIBOR.” While credit-sensitive rates have entered the race for a spot in the post-LIBOR landscape, SOFR remains the preferred alternative by the most prominent regulatory bodies and has seen a significant rise in trading volume since the late July launch of the SOFR First initiative.
The look forward
Market participants are gearing up for a busy week of economic data releases with updated figures on the Consumer Price Index, the Empire Manufacturing Index, retail sales, and jobless claims, among others, dotting the economic calendar. No Federal Reserve officials will speak next week as they enter the blackout period before the September 21–22 FOMC meeting.
Market implied policy path (Overnight indexed swap rates)
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