Skip to main content
Market Update

U.S. interest rates surge on Fed’s hawkish stance, omicron weighs on recovery

Date:
January 10, 2022

Summary

Minutes from last week’s Fed meeting revealed an increased chance of three rate hikes in 2022, driving interest rates to levels not seen since April 2020. Major commodity inputs remain significantly elevated while USD’s strengthening trend is muted to start the new year. Weak job creation disappointed markets while strong employment numbers affirm the Fed’s likelihood to raise rates.

Hawkish Fed stance drives up rates

U.S. rates continued the upward trajectory that started in mid-December, climbing to one-year highs off of the back of a more hawkish stance from the Fed. Announcements of the potential to accelerate the timeline for rate hikes in tandem with the quickening of tapering drove the 10-year treasury yield up from just above 150 bps to above 175 bps last week — the highest levels seen since April 2020. For those seeking to reduce exposure to interest rate risk, swap rates have come up, but remain at historic lows.

Commodities start the year up across the board

In an indication of continued supply chain challenges and geopolitical strife, most major commodities indexes started the year elevated significantly above their prices at the start of 2021. At the end of last week, Crude Oil was up more than 53% YoY, Natural gas was up more than 44% YoY, copper was up 18% YoY, and steel was up more than 8% YoY. The inflated prices of key commodities have been a key contributor to the dampening of global economic recovery as manufacturers see profit margins on related goods impacted and consumers feel the impact on their wallets.

USD strengthening trend subdued in new year

DXY remained elevated at the start of the year, up roughly 7% since the beginning of 2021. However, the dollar strengthening trend seen from September through late November has slowed and the dollar has remained flat over the last month. Surging cases of the COVID-19 omicron variant as well as inflationary concerns are weighing on the dollar even as the forecast for interest rates in the U.S. accelerates relative to other global interest rate markets.

Mixed job numbers

Likely another impact of the omicron variant, Friday’s Nonfarm Payrolls report disappointed with the U.S. adding only 199k jobs in the last month of 2021, falling significantly below the forecast of 400k jobs added. However, the jobless rate fell to 3.9% and hourly wages increased 4.7% YoY, reinforcing the Fed’s stance earlier in the week that it may need to raise rates.

The week ahead

On Wednesday, we get the new YoY U.S. inflation rate, currently forecast to be at 5.4% — December’s YoY inflation rate was 4.9%. We also get December MoM retail sales on Friday, forecast to be up 0.3%, which would match the prior period’s increase. Keep a look out on interest rate and FX markets as the markets continue to digest the Fed’s more hawkish stance and the ongoing omicron surge in the U.S.

(Related insight: Watch Chatham CEO Matt Henry discuss Inflation, COVID-19, and capital markets trends)

Subscribe to receive our market insights and webinar invites


Disclaimers

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.

22-0012