Fed cuts but signals pause

November 4, 2019 Chatham Financial

Prior week summary

The major U.S. equity indices continued to rally higher last week, touching all-time highs and notching a fourth consecutive week of gains, as a combination of solid economic data and perceived progress in U.S./China trade negotiations worked to improve investor sentiment. Market participants were bombarded with high-profile economic releases throughout the week with third-quarter GDP, the October non-farm payroll report, and the ISM Manufacturing Index all set to release. The U.S. economy grew at a 1.9% pace in the third quarter, above the 1.6% consensus expectation, but slower than the second quarter's 2.1% pace. The non-farm payroll report surprised heavily to the upside as the U.S. economy added 128,000 jobs in October, far surpassing the 85,000 job estimate, and the August and September employment figures were revised sharply higher to 219,000 and 180,000 job additions, respectively. Friday’s release of the ISM Manufacturing Index fell below expectations to 48.3, its third consecutive month in contraction territory, but was offset somewhat by September’s construction spending figures which topped analyst expectations. On the trade front, U.S. and Chinese officials held a “constructive” phone call on Friday regarding phase-one of a trade deal. The U.S. Trade Representative Office released a statement after the call commenting, “They made progress in a variety of areas and are in the process of resolving outstanding issues.”

In a move widely expected by the market, the FOMC opted to cut the target range 25 basis points to 1.50% - 1.75% at the conclusion of Wednesday’s policy meeting. Federal Reserve Chair, Jerome Powell, suggested that monetary policy would be put on hold barring a strong shift in the outlook saying, “We see the current stance of policy as likely to remain appropriate as long as incoming information about the economy remains broadly consistent with our outlook,” and also noted, “We would need to see a really significant move up in inflation that’s persistent before we consider raising rates to address inflation concerns.” In the eurozone, the European Central Bank (ECB) left its policy rate unchanged and resumed a €20 billion per month asset purchase program. In his final address, outgoing ECB President, Mario Draghi, advocated for eurozone countries to provide fiscal stimulus in tandem with the ECB’s accommodative monetary policy stating, “We need a euro-area fiscal capacity of adequate size and design: large enough to stabilize the monetary union, but designed not to create excessive moral hazard.”

The look forward

In a light week for economic data, market participants are awaiting updated figures on factory orders, the ISM Non-Manufacturing Index, the trade deficit, and wholesale inventories.

Rates snapshot

 

Market implied policy path (Overnight indexed swap rates)

Source: Chatham Financial

 

Fixed income snapshot

Source: Bloomberg Finance L.P.

Disclosures

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. 19-0280

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