Market Insights – October 1, 2018

October 1, 2018 Chatham Financial

Fourth Quarter

View this week's rates.

Prior Week Summary

As was widely expected, the Federal Open Market Committee (FOMC) voted unanimously last week to raise the federal funds rate 25 basis points, while removing language from the policy statement that characterized monetary policy as “accommodative.” This second detail in the policy statement is important to point out, as it represents the first time in many years that the rate-setting body has indicated that a majority of voting members believe the policy stance is relatively neutral. With the release of the Committee’s updated summary of economic projections, the group reiterated its expectation for another hike at the December meeting and a total of 3 additional hikes next year.

The report further detailed that the Committee's median expectation for GDP growth for the remainder of 2018 increased to 3.1%, adding 0.3% from the June projection. Over the longer term, however, expected changes to GDP, PCE inflation and the unemployment rate were relatively unchanged for the periods where there is comparative data. With the introduction of the 2021 data points, it appears clear that the Committee members expect economic growth to slow in 2020 and 2021 while PCE inflation remains close to its current level. Specifically, the median expectation is for GDP growth to fall to 2% in 2020 and to 1.8% in 2021.

In other market news, as was previously announced, the CME has indicated that it has launched clearing for SOFR-based interest rate swaps. The products available for clearing at this point include SOFR referenced OIS swaps and basis swaps between LIBOR and Effective Fed Funds. It was also interesting to note the relatively elevated setting for spot SOFR into quarter-end, which again set well above similar tenor unsecured rates.

The Look Forward

The data calendar is full this week with updates expected for the manufacturing sector, the labor markets as well as our national trade.

 

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 – September 24, 2018
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