Trade Relations Warm

September 16, 2019 Chatham Financial

Prior Week Summary

U.S. equities notched a third straight week of gains as investor sentiment received a boost on the back of a more-dovish-than-expected European Central Bank (ECB), easing trade tensions, and solid U.S. economic data. In a promising sign for trade negotiations, China released a list exempting 16 categories of U.S. products from 25% tariffs, beginning September 17th. The Trump administration responded quickly to Beijing’s olive branch postponing the implementation of a 5% tariff on $250 billion of Chinese goods to October 15th from October 1st, citing a desire to respect the 70th anniversary of the founding of the Peoples Republic of China on October 1st. Further improving the outlook, China said it would encourage companies to purchase U.S. agricultural products and would exclude U.S. farm products from any additional tariffs going forward. The developments come as the two sides prepare for face-to-face negotiations in Washington next month. On the U.S. economic data front, results were largely positive. Friday’s release of retail sales figures saw a 0.4% increase month over month, above analyst calls for a 0.2% gain. Inflationary measures, PPI and CPI, both posted levels above expectations with Core CPI rising 2.4% year over year.

The ECB cut its deposit rate by 10 basis points to -0.5% and signaled that rates will remain at “present or lower levels” until inflation moves closer to its “near but just below 2%” goal. Additionally, the ECB announced plans to revive its quantitative easing program by buying EUR 20 billion of securities per week beginning on November 1st. Speaking on the outlook, ECB President, Mario Draghi, noted, “We have headroom to keep going on for some time at this rhythm. We still think the probability of recession for the euro area is small, but it’s gone up.” Separately, a drone attack on a Saudi Arabian crude manufacturing plant sent crude oil prices soaring more than 10% over the weekend as roughly 5% of global output has been disrupted. Saudi Arabian officials estimated that a third of the lost output will be restored by Monday, and President Trump authorized the “release of oil from the Strategic Petroleum Reserve, if needed, in a to-be-determined amount, sufficient to keep the markets well-supplied.”

The Look Forward

All eyes will be on the FOMC’s two-day policy meeting beginning on Tuesday. Market participants widely expect the FOMC to cut the target range by 25 basis points to 1.75% - 2.00%. Updated figures on the Empire Manufacturing Index, industrial production, housing starts, and existing home sales dot the economic calendar, among others.

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. 19-0234

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