"We have a deal"
Summary
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.
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.
Markets
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)
Rates
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”)
Commodities
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.
Lumber and Brent crude oil prices June 2019 through June 2021
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.
About the author
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.
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