Market Insights June 6, 2016 Download This Week’s Market Insights Prior Week Summary Over the course of the last few months, the perceptions for the likely path forward for the Fed Funds target rate have fluctuated wildly. Following the Fed hike in December, market based variables suggest that traders have vacillated between pricing in as few as one hike over the course of the next 2 years at their most pessimistic point and as many as 3 and a half hikes over the same time frame at their most optimistic. However, it stands to reason that actual economic demand, growth, and inflation prospects have not been as volatile as the market’s reactions to any individual data point would suggest. Following the Labor Department’s report on Friday that employers added the fewest number of workers to payrolls in almost six years,…

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Negative LIBOR Strategy Chatham Financial White Papers – May 2016 Negative USD LIBOR!?: A Brief Background It was hard not to imagine Sisyphus’ allegorical rock rolling back down the hill when the topic of negative interest rates in the U.S. went viral in February. This, only a few short weeks after the Fed carefully raised their target range for the policy rate following years at the zero lower bound and simultaneously guided the markets to expect a smooth ride to a cruising altitude of 3% for the funds rate. Those of us who had forecast (or hoped) for the frequency of our use of the terms “inevitable, unprecedented, and unconventional” to decline to their pre-crisis levels were disappointed by a more volatile reality, yet again. But as we lay out the relatively rapid rise, and subsequent rationalization, of the market’s…

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Market Insights March 7, 2016 Download This Week’s Market Insights Prior Week Summary The Treasury market closed on Friday at the highs for the week in yield terms, culminating with a strong headline print on the February payrolls report. The Labor Department reported that the economy added 242,000 jobs in February, following a gain of 172,000 in the month of January. The improvement was greater than the 195,000 gain that was expected by economists surveyed by Bloomberg prior to the release and could help underscore statements made by Fed officials about the strength of the labor markets helping to pull up inflation expectations in the intermediate term. However, the report was somewhat more mixed than the strong headline figure would seem to indicate as the report also detailed a drop in average hourly earnings on a monthly basis, which fell…

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Market Insights February 22, 2016 Download This Week’s Market Insights Prior Week Summary The Treasury market closed the week nearly were it began as a mixed bag of incoming information left the curve relatively unchanged on the week. At the same time, the S&P 500 rallied 2.8% during the holiday shortened trading week, continuing the rebound from the multi-year lows reached only a few days ago. On a positive note, consumer price inflation rose to the highest level in over three years on a year-over-year basis, rising 2.2% excluding food and energy. The core measure rose 0.3% in January, counter to expectations for a decline, as increases in medical care prices, housing costs, and the auto sector pulled the index higher. The strength of the print surprised the market and will likely be used to support the notion that improving…

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Market Insights February 16, 2016 Download This Week’s Market Insights Prior Week Summary The persistent and elevated volatility in the fixed income, commodity, and equity markets has continued in earnest of late, driving Treasury yields to recent lows and market sentiment seemingly lower. For reference, the closing price of the Dow Jones Industrial Average has changed by at least 100 points on all but 6 trading days so far in 2016, leaving the index lower by approximately 8% year-to-date. On an intra-day basis, the 10-year note fell to 1.52% on Thursday, the lowest level at that point of the curve since 2012. At the same time, WTI crude flirted with $26 a barrel on global growth concerns and the expanding macro-economic implications of negative sovereign yields. Fed Chair Janet Yellen set the stage for last week’s bout of volatility by…

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Market Insights February 8, 2016 Download This Week’s Market Insights Prior Week Summary The U.S. economy added 151,000 new jobs last month, well below the amount of job gains that were estimated by economists prior to the report. The lower than forecast gain followed a downward revision of 30,000 jobs from the December report, reducing the initial estimate of 292,000 jobs to 262,000. Despite the relative weakness in labor markets implied by the headline figure, economists were quick to point out improvements in the labor force participation rate, ongoing growth in wages, and continued improvement in the length of the workweek. The Household Survey showed a 615,000 increase in employment, and a 113,000 decline in unemployment, which provided a positive benefit to the labor force participation rate, which increased by 0.1% to 62.7% – the third consecutive month of gains…

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Market Insights February 1, 2016 Download This Week’s Market Insights Prior Week Summary Interest rates moved lower to end the week, capping a month that saw a nearly 40 basis point decline in the 10-year swap rate, bringing the curve to the lowest levels since mid-2013. The combination of a surprise announcement by the Bank of Japan, a weak GDP print, and a Fed statement that downgraded the inflation outlook weighed on the curve and has caused market participants to push out into the future expectations for any additional Fed tightening. As of this writing, the market appears to be pricing in only 1 hike in the 4th quarter, providing a stark contrast to the 4 quarterly hikes that were implied by the Fed’s December dot plot. Indeed, the Fed acknowledged that “inflation is expected to remain low … in…

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Market Insights January 25, 2016 Download This Week’s Market Insights Prior Week Summary It seems fitting that an unusually volatile week of trading in the markets during a holiday shortened week would be capped off by an unusually heavy winter storm in the Northeast that left much of the region blanketed by snow, with some areas getting over 2 feet. The commodities sector continues to be in the drivers seat, as a plunge and subsequent rebound of the oil price pushed stocks around in hectic trading. The price of oil has fallen to the lowest levels since 2003 amid concerns that ongoing turmoil related to China’s slowing growth rate would crimp fuel demand at the same time that the supply of the commodity has been increasing, partly due to oncoming Iranian supply among other factors. It appears as though, traders…

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Market Insights December 14, 2015 Download This Week’s Market Insights Prior Week Summary After nearly a decade since the last increase in the Fed Funds target rate, the Fed is widely forecasted to achieve lift-off following the Wednesday meeting of the Federal Open Market Committee. As of this writing, the market implied probability of a hike on Wednesday stands at 78%, with the 2-Year Treasury note offered at 93 basis points. It is striking that with only 2 days left until the decision, there would be as much lingering doubt about this widely telegraphed outcome among market participants. The percentage of investors in the “no-change” camp have grown increasingly concerned about the continued decline in commodity markets and the nascent struggle in the high yield bond markets. To be clear, the probabilities implied in options pricing don’t represent a true…

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This Friday morning, die-hard Star Wars fans will awaken to a powerful force that hasn’t been felt in theaters for a decade – a new installment to the iconic franchise. For the seventh time, moviegoers will turn out in droves to watch Jedi knights, storm troopers, and all kinds of alien beings fight for galactic dominance. If history is any guide, the theaters will be filled with patrons sporting Darth Vader masks, Obi-Wan Kenobi beards, and even styling Princess Leia’s bagel-sized hair buns. Despite the anticipation, no long-time fan of the franchise goes into Friday without a healthy amount of trepidation. For while the first trilogy received rave reviews at the time and lives on in treasured popular memory (with a stunning Rotten Tomatoes average of 96%), the second (prequel) trilogy stumbled badly (with a middling Rotten Tomatoes average of…

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