Volatility across all sectors as the market anticipates a slower recovery
COVID variants and disappointing economic data dominated the market this week, leading to volatility in all sectors. Treasury yields dropped before rebounding slightly to end the week. Oil hit a 6-year high on Tuesday before dropping off, and the U.S. Dollar showed continued signs of strengthening before falling to end the week.
The global COVID death count exceeded 4 million on Wednesday as the Delta COVID-19 variant continues to move rapidly around the globe. The biggest news came from Japan, which declared a state of emergency and forced the IOC to pull the plug on any spectators attending the Olympic games in Tokyo, scheduled to begin next Friday. Pfizer announced on Thursday that it is currently developing a COVID-19 booster shot to target the Delta variant, stating their belief that a third booster shot will be needed within 12 months.
The FOMC minutes from the Federal Reserve’s June meeting showed talk of tapering but, ultimately, a push for patience in the recovery effort. Several Fed members indicated the recovery was moving along faster than anticipated. However, the over-riding sentiment was not to rush and to ensure the market is prepared for any shift in Fed policy. Some Federal Reserve officials think it’s time to discuss tapering policy, allowing plenty of time for the market to digest the policy before it is implemented. Both the DOW and the S&P fell mid-week amidst concerns for economic recovery, before recovering those losses on Friday to close the week strong.
(Related insight: Register for the “Semiannual Market Update for Corporations” webinar with Amol Dhargalkar and Kevin Jones)
Treasury yields fell rapidly before rebounding on Friday as markets showed concern for a slowing economic recovery. The 10-year treasury dropped as low as 1.25% on Thursday before recovering slightly to end the week. A combination of weaker-than-expected economic data and the Fed showing signs of patience contributed to this response. Weekly jobless claims plateaued, after dropping rapidly through the beginning of June, coming in at 373K this week. Expectations for initial jobless claims were 350K. With the drop in rates last week, many corporations with expected fixed-rate debt issuances are seeking to lock in their long-term exposure in the current market.
(Related insight: Read "Managing interest rate risk on future debt issuances")
Oil prices remained volatile amidst conflicting news reports. Oil hit a six-year high on Tuesday at $76.98 per barrel. Those highs quickly faded as OPEC+ remained in a standoff over a disagreement on production levels for the rest of the year. Brent futures fell by as much as 5% as Saudi Arabia and the United Arab Emirates remained at an impasse. Oil rebounded slightly on Thursday and Friday after the U.S. government released a report that showed demand increases, coupled with a drop in supply.
The European Central Bank raised its inflation target rate last week, saying it will target inflation of 2% instead of “close to but below 2%.” EUR jumped following this announcement after the dollar strengthened early in the week. Investors had been moving toward the dollar on the back of a more hawkish stance from the Federal Reserve, but a higher inflation target from the ECB shifted investors towards EUR.
(Related insight: Read the article, "Operational FX hedging programs and the one leading practice you can't afford to ignore")
The market will keep a close eye on CPI numbers scheduled to come out on Tuesday. The current expectation is for 0.5% month-over-month growth and 5.0% year-over-year growth. Later in the week, the market will continue to monitor the job market with jobless claims on Thursday, as well as retail sales and consumer sentiment scheduled for release on Friday.
Subscribe to receive our market insights and webinar invites
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.21-0189
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...