Market Insights – July 9, 2018

July 9, 2018 Chatham Financial

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Prior Week Summary

It was a relatively quiet week for data and trading activity as many market participants seemed to be out of the office for an extended July 4th holiday. The economic news of the week was the release of the June payrolls report which detailed that employers added 213,000 jobs last month, while upwardly revising the May report to 244,000. The unemployment rate increased slightly, to 4.0%, largely due to a 0.2% increase in the labor force participation rate. Job seekers benefited from a healthy improvement in average hourly earnings, which have increased 2.7% on a year-over-year basis. The June employment report brings the total number of jobs added over the course of the year to 1.3 million, an increase of roughly 200,000 from the prior 6-month average.

In aggregate, the report will likely confirm the Fed’s current tightening posture but does not seem to suggest that the Committee will need to increase the pace of rate increases from the current trajectory.

In other news, the U.S. placed tariffs on roughly $30 billion worth of imports from China on Friday as the ongoing trade tensions between the world’s two largest economies escalate. At current levels, the tariffs represent a tiny fraction of aggregate GDP but have the potential to become significantly more relevant if the tensions increase.

The Look Forward

For those of us not on vacation this week, the market will look forward to the minutes of the latest FOMC meeting on Wednesday and the results of the June employment report on Friday.

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.

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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 – July 9, 2018

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Market Insights – July 9, 2018

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Rates continued their flattening trend last week, led by weakness on the front-end of the curve as the Fed minutes were interpreted by the market to be somewhat hawkish.

Equities took the market for a ride last week, trading with elevated volatility that brought the Dow Jones Industrial Average lower by roughly 1,000 points (-4.1%) on a week-over-week basis.

As was widely expected, the Federal Open Market Committee (FOMC) voted unanimously last week to raise the federal funds rate 25 basis points.

Rates rose over the course of last week in anticipation of a likely 25 basis point hike by the FOMC on Wednesday.

The market began the week looking forward to updates on the inflation landscape for potential confirmation of the strength in recent reports.

The August employment report jolted the market back to life after a relatively low-key end to the summer. The Labor Department reported that wage growth increased 2.9% from a year earlier...

It was a relatively slow week in the markets as many seemed to be enjoying an extended vacation in advance of the long Labor Day holiday weekend.

Markets seem to have taken an early start to the Labor Day holiday as activity has been relatively muted as the summer draws to an end.

The World Bank is reported to have made history early last week by being the first issuer to hedge a floating rate bond deal with a swap tied to the new SOFR index.

Last week was another relatively uneventful summer week that saw very little in the way of interesting economic data points.

Last week saw a number of important data releases come and go with relatively little market volatility.

Last week was relatively busy with economic updates, including the release of the much anticipated second quarter GDP figures.

Last week began with relatively quiet trading conditions, as fixed income markets have been remarkably stable to start the summer.

As many in the financial press have noted, it isn’t hard to find examples of inversions priced into forward markets or to find forecasting firms predicting a potential recession in 2020.

The first half of the year is officially in the books and market participants are taking stock of positions heading into the holiday-shortened week.

It was a relatively lackluster week for the limited amount of data that was released. Most of the housing data came in below market forecasts.

It was an active week for financial markets that saw the FOMC raise their target range for federal funds by 25 basis points to a range of 1.75% – 2.00%.

The fixed markets sold-off last week in advance of a very active few days for news relating to international diplomacy, global central banking and another wave of Treasury supply.

The fixed income markets went for a ride last week on a holiday-shortened schedule, as the risk of financial market contagion re-entered the vernacular

The interesting economic news of the week centered around a rather technical aspect of the Fed’s approach to conducting monetary policy that was outlined in the May FOMC meeting minutes.