Tumultuous first quarter culminates with a wave of buoyant optimism
- April 5, 2021
Corporates | Kennett Square, PA
After enduring Q1 volatility, including the GameStop frenzy and a severe spike in energy prices during the Texas freeze, the quarter wrapped up on a high note with the freeing of the Ever Given, the S&P 500 ending over 4,000, and blockbuster manufacturing PMI and March jobs reports.
With Covid-19 vaccine rollout reaching three million doses administered per day, the U.S. economy is gaining momentum as ~38% of adults have received at least one vaccine dose. Accelerated hiring in March added 916,000 jobs (which crushed the consensus expectation of +650,000) and resulted in the unemployment rate falling to 6.0%. The U.S. manufacturing activity in March also strongly beat expectations as the ISM Manufacturing PMI came in at 64.7 versus a forecast of 61.3, the index’s highest level since 1983.
This week, details of the proposed $2.3 trillion plan to upgrade infrastructure, create new jobs, and tackle climate change were revealed. The plan proposes to pay for the spending through an increase to the corporate tax rate from 21% to 28%.
The yields on benchmark 10-year treasury securities closed at 1.72% to end the week (after going as high as 1.765% earlier in the week during intraday trading) after the positive news on the economy and continued expectation of rising inflation. This continued the theme of long-term rates escalating throughout Q1 with the 10-year yields rising 81bps in the quarter and meaningfully steepening the yield curve.
For companies managing interest rate risk, analyzing capital structure, and seeking to minimize interest expense, the above market events re-enforced the importance of hedging strategy.
(Related insights: Read "Pre-issuance hedging in today's market," and register for the upcoming webinar, "Pre-issuance hedging: Practitioners share insights on why and how")
The U.S. dollar rebounded broadly in Q1, reversing the weakening trend it experienced in the second half of 2020. The U.S. Dollar Index (DXY) is up nearly 4% since the start of the year driven by strong economic recovery expectations and rising treasury yields. The Euro fell ~2% in March against the dollar, while CNY heads for its worst month against the dollar in over 1.5 years.
The Turkish Lira rapidly depreciated by 10% against the U.S. dollar in March, following news of removal of the governor of its central bank and his deputy by the Turkish president. This rapid movement of the exchange rate highlighted the need to manage currency risk carefully in these dynamic times.
(Related insight: Read "Operational FX hedging programs and the one leading practice you can’t afford to ignore")
Some welcome news on Thursday emerged when the OPEC+ oil alliance announced its decision to increase output gradually from May and release more barrels to the market to keep crude prices from rising further.
Q1 also brought a strong rally in grain prices, which jumpstarted the farm economy across the U.S. Midwest and lifted the prices to buy and rent farmlands aided by government stimulus and low interest rates.
As we start Q2 riding the optimism, some market trends to focus on are higher treasury yields, rising consumer demand, along with supply side constraints stoking inflation and a resurgent U.S. dollar with potential to weigh on corporate profits.
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.21-0096
Our featured insights
Omicron takes center stage with the Federal Reserve on standby
Omicron spreads cases and fear, disconnect grows between economic data and average American sentiment, the Fed may taper faster than anticipated, markets and long-term treasury rates fall, and the U.S. debt ceiling looms over the country.
2022 treasury trends and market dynamics
Inflation, changing labor market dynamics, and other key factors will impact both strategic and operational decisions treasury teams make to manage their financial risks.
Chatham Financial announces CEO transition effective January 2022
Matt Henry named the next Chatham CEO
Markets weigh omicron threat
Two key events spurred markets this week — Chair Powell’s renomination to the Fed on Tuesday and the spread of the omicron variant of COVID-19. While market sentiment rose to start the week following the renomination, fears that the omicron variant could diminish global growth dampened markets to...
U.S. retail sales and industrial production soar amid renewed concerns in Europe
The U.S. dollar climbs as strong economic data continues to bolster market sentiment regarding America’s economic recovery.
Latest CPI data shows prices increasing at fastest rate since 1990
The latest CPI data came in significantly above expectations, leading to some risk-off sentiment in markets. Expected timing for future rate hikes in the U.S. moved forward, which led to appreciation in the dollar.
Volatility increases as market digests Fed tapering, U.S. jobs numbers, central bank outlooks, and crude oil supply
The Fed solidified its tapering plans for November and December, committing to monthly reductions of $15 billion in asset purchases. Rates, FX, and commodities all saw increased volatility as the market reacted to stronger-than-expected U.S. jobs numbers, disparity in outlook between central...
Economic growth slows in third quarter as Biden unveils “Build Back Better” framework
The American economy suffered its worst quarter since Q2 of 2020 as gross domestic product slowed to 2% growth (annualized) in the third quarter. President Biden also revealed the “Build Back Better” plan framework amidst a week filled with a plethora of economic data.