Recession fears abound

October 7, 2019 Chatham Financial

Prior Week Summary

The S&P 500 fell 0.34% on the week, posting its third consecutive weekly decline as recession fears took center stage, clouding the outlook and rattling equity markets. Investor sentiment turned sour early in the week when the ISM Manufacturing Index fell far below expectations, posting a level of 47.8 which suggests the manufacturing sector is contracting. The manufacturing slowdown has appeared to spill over into the services sector as the ISM Non-Manufacturing Index also fell below expectations to 52.6, the lowest reading in three years. Friday’s non-farm payroll report indicated that the U.S. economy added 136,000 jobs in September. While the jobs figure missed expectations, the unemployment rate dropped to 3.5%, the lowest level in nearly 50 years, and August hiring figures were revised upward. The Fed Funds futures market is pricing in just over a 70% chance for a rate cut at this month’s FOMC meeting, significantly higher than the 40% chance implied at the start of the week. Speaking at a “Fed Listens” event in Washington, Federal Reserve Chairman, Jerome Powell, downplayed recession fears saying, “I would not see a recession as the most likely outcome for the United States or the global economy,” and noting, “Unemployment is near a half-century low, and inflation is running close to, but a bit below, our 2% objective.”

On the trade front, the U.S. announced it will levy 10-25% tariffs on $7.5 billion of European Union (E.U.) goods, starting October 18th, after the World Trade Organization (WTO) ruled E.U. subsidies given to Airbus SE were illegal. In Washington, the political turmoil continued as the impeachment inquiry moved ahead and a second whistleblower came forward.

The Look Forward

Market participants will be awaiting updated figures on wholesale inventories, the Producer Price Index, and the Consumer Price Index in a relatively quiet week for economic releases. U.S. and Chinese officials are set to hold talks on October 10th and 11th, but hopes of a broad agreement are fading after Bloomberg News reported on Sunday that China is looking to limit the scope of a potential agreement and will not make “commitments on reforming Chinese industrial policy” or “government subsidies.” FOMC minutes from the September meeting are released on Wednesday, and a host of Federal Reserve officials are scheduled to speak throughout the week.

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. 19-0265

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