"We have a deal"
- June 28, 2021
Treasury Advisory and Technology
Corporates | Denver, CO
Amidst rising inflation and looming fears of a Fed tapering, an exuberant President felt confident that a deal had been reached with a group of bipartisan senators paving way for a roughly $1.2 trillion infrastructure bill.
Late last week after intense negotiations, a group of bipartisan senators reached an agreement on the size of the infrastructure bill. While less than the originally proposed amount, this bill will put an expected $312 billion towards transportation projects, $73 billion for power, $65 billion for broadband, and an additional $266 billion towards non-transportation related infrastructure. With the assent of 11 Republicans and 10 Democrats in the Senate who backed this proposal, the bill is expected to pass through both chambers of Congress.
Equity markets warmly embraced this new agreement with both the S&P 500 and Nasdaq reaching record highs. But optimism waned slightly as the downward trend of the number of initial jobless claims seems to have stalled. Claims were at 411,000 for the week, ending much higher than the post-pandemic low of 374,000 claims reached in early June. This mixed news further confounds the decision path to address inflation concerns. The Fed’s preferred inflation gauge, the core personal consumption expenditures index (PCE), also rose 3.4% in May, its fastest increase since the early 1990s. And while inflation concerns abound, Chairman Powell has stuck to his script that such elevated inflation numbers are more transitory and that the Fed doesn’t consider a rate hike likely until 2023.
(Related insight: Register for the “Semiannual Market Update for Corporations” webinar with Amol Dhargalkar and Kevin Jones)
The dichotomy of higher inflation and the Fed’s dovish stand is seeing short-term rates rise while the long end of the curve edges downwards. The 3-year swap rate saw an increase of 15-20 bps from a month ago while the 30-year saw a decrease of 10 bps. Owing to the curve shift, more companies are now considering entering into shorter duration pay-fixed swaps before any change in the Fed’s tone takes hold on interest rates.
(Related insight: Read the article, “Receive-fixed interest rate swaps: what corporates need to know”)
Commodity prices saw increased volatility last week as China announced auctions of state metal reserves and probes into surging prices to curb the commodity rally. While lumber prices were half of their record highs from a month ago, crude oil inched towards its highest in three years, supported by increased demand as factories ramp up global manufacturing. As crude prices keep rising, there is greater consensus that the OPEC+ will announce a further increase in production in the coming weeks to meet the higher demand.
The week ahead
This week, non-farm payrolls will claim the limelight as the economy starts adjusting to a sustained level of output after the pandemic. While the markets expect 675,000 new jobs for the month of June, the prior readings for April and May both came in below expectations.
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.21-0182
Our featured insights
European Central Bank keeps stimulus torch lit as U.S. officials consider dimming the flame
Continued upward pressure on prices in the United States remains the economic theme as the Fed signaled more appetite for gradually reducing their bond buying program. This is in contrast with the European Central Bank’s continued economic stimulus.
Inflation acceleration makes Fed uncomfortable
Inflation continued to dominate conversations with elevated CPI numbers leading to tough questions for the Fed chair at his Congressional testimony. The 2-5 year treasury yields increased but long-term yields continued to fall. Meanwhile, OPEC reached a compromise with the UAE, agreeing to higher...
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...
Market dissects confounding jobs report
The highly anticipated June jobs report delivered conflicting results with a strong beat in payroll expectations diverging from the slight increase in the unemployment rate. The dollar had another week of appreciation before cooling on Friday as interest rates dipped slightly. Oil prices neared...
Hawks begin circling the Fed
The Fed holds short-term rates steady but indicates rate hikes in 2023. The Fed’s inflation expectation revised upward to 3.4%. Equities fall, dollar strengthens, and 10-year Treasury rates are mixed. The U.S. economic recovery continues.
CPI prints at decade high while Treasury yields plummet to quarterly lows
Inflation data last week printed at the highest level since 2008 as investors weighed its transitory nature. Signaling expectation of continued dovishness by the Fed amid economic reopening, stocks hit record highs. Curiously, Treasuries also rallied as yields fell to three-month lows.
Market reacts to Fed commentary and May jobs report
The market parsed through Fed commentary during the week that hinted at a slightly more hawkish stance before turning its focus to the May jobs report. The nonfarm payroll numbers were slightly below expectations, easing concerns of earlier-than-expected rate hikes and mildly weakening the...
Enable data-driven decision making and avoid potential pitfalls with reporting dashboards
To spot important data trends and crystalize them into actionable insights, corporate treasurers need robust reporting capabilities within their financial risk management systems. Advanced reporting tools should include a complete dataset, flexible-but-focused dashboards, and proactive trend...