Treasuries, crypto, and oil bring us into 2021
Corporates | Denver, CO
SummaryThe Georgia Senate election results were finalized during a tumultuous week, along with the official certification of Joe Biden as the next U.S. President.
The Georgia Senate election results were finalized during a tumultuous week, along with the official certification of Joe Biden as the next U.S. President. With a Democratic majority in the House of Representatives and what some view as an effective majority in the Senate, there appeared to be the prospect of additional stimulus. However, these hopes hit a potential roadblock Friday with West Virginia Senator Joe Manchin vehemently opposing a new round of stimulus checks.
December nonfarm payroll numbers were published this week, showing a loss of 140,000 jobs, largely missing the expected addition of 50,000 jobs. Employment losses in the leisure and hospitality sector drove the negative jobs report, motivated by the second wave of lockdowns.
Interest rate environment
While core inflation figures remain well below the Federal Reserve’s targeted 2.0% average, we rang in the new year with the 10-year break-even inflation rate breaching 2.0 percent, a level not seen since late 2018. This is a measure of the market’s expectation for inflation over the next decade. This breakout, along with the election results, drove both the 10-year treasury yield and 10-year swap rate above 1% for the first time since March 2020. Despite the upward trend in the 10-year treasury yield since the beginning of the year, Federal Reserve Vice Chair Richard Clarida spoke on Friday, January 8, and expressed his expectation that the current pace of purchases will be maintained through 2021. For context, that currently stands at $120 billion per month, part of which is a minimum of $80 billion in Treasuries. Given the Federal Reserve’s expressed intention of remaining in the markets until the U.S. hits its employment and inflation targets, corporations may still wish to consider locking in rates for future debt issuances.
(Related insight: Read “COVID-19 impacts on future debt issuances”)
The key currency theme for 2020 was the U.S. dollar’s decline relative to all other major currencies.
However, the elephant in the currency room is the breakout of Bitcoin. This week, the cryptocurrency broke past $40,000, subsequently falling to $32,000 Monday morning. The previous rally seen in late 2017 was primarily driven by retail investors. This current run, fueled by inflation concerns and pure asset diversification interests, appears to have the added backing of institutional investors and some corporations. Most notably, Massachusetts Mutual Life Insurance and Square who invested $100 million and $50 million (both amounts not material to the institutions), respectively, into the crypto currency.
As companies embrace 2021 planning and navigate a post-Brexit world, along with a new administration and a continuing battle with COVID, many are evaluating whether their FX risk hedging programs are continuing to meet their needs, or whether changing market dynamics have impacted their global risk profile.
(Related insight: Register for the webinar, “An Altered Currency Landscape and Impact to Corporate Hedging Programs” on January 21)
The oil producer group OPEC announced this week that members intend to keep production at current levels, rather than increasing the supply, prompting both major oil indices, Brent and WTI, to begin trading above $50 per barrel. Prices remain below pre-pandemic levels (both traded above $60 in January 2020), but there is optimism for the year as global vaccinations would suggest an increase in demand for oil.
The week ahead
Further economic indicators and earnings data will be rolling out this week. Consumer price inflation data is due Wednesday, with the expectation of a slight increase. The large U.S. banks will be posting fourth quarter earnings Friday.
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.21-0008
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...