Market Insights - December 10, 2018

December 10, 2018 Chatham Financial

Volatility Hits Markets

View this week's rates.

Prior Week Summary

The markets went for a ride last week as investors had to square their optimism around the prospect for an end to the escalating trade war between the U.S. and China, and the reality that the positive characterization of the talks provided by administration officials may have been premature. The equity markets struggled to find a clearing level and erased all of the gains earned year-to-date, again. It also probably did not help that the fixed income markets seem to be sending out distress signals as well. The curve inversion that began in recent days appears to be accelerating somewhat as the spread between the 2-year and 10-year swap rates briefly went negative mid-week. While that spread has since reverted to a modestly positive spread, shorter tenors of the Treasury and Swap curve remain inverted. Market strategists frequently point to the ability of curve inversions in U.S. markets in the recent past to “predict” future recessions.

The repricing in short-term interest rates has eroded the market-implied probability of the number of Fed rate hikes priced in during 2019. The implied probability of a hike in December remains close to 70%, but following that meeting, there are now no additional hikes priced into derivative markets.

In economic news, the November non-farm payrolls report disappointed expectations, as the labor markets added just 155,000 jobs during the month. The headline unemployment rate remained constant at 3.7%, while the underemployment rate actually increased by 0.2% to 7.6%.

The Look Forward

There is an active data calendar this week, with updated statistics on producer and consumer inflation, as well as retail sales.

 

Rates Snapshot

Sources: Bloomberg Finance L.P., (Treasuries) Chatham Financial (Swap Curves), FHLB Boston, Chicago, Dallas, Des Moines for FHLB Advance Rates. Wells Fargo Brokered CD Indications.

 

Market Implied Policy Path (Overnight Indexed Swap Rates)

Source: Chatham Financial

 

Fixed Income Snapshot

Source: Bloomberg Finance L.P.

 

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 http://www.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.

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Market Insights - December 17, 2018
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Market Insights - December 3, 2018
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