Member Services Desk: WEEKLY MARKET UPDATE
Economy and Markets
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There was no change to the Federal Funds Rate, as expected; the Federal Open Market Committee decided to maintain its target range at 0 to .25%. After the FOMC meeting, the Federal Reserve released its latest Summary of Economic Projections (SEP). This projection illustrated the committee’s expectation of no change to the Fed Funds rate over the next several years, thereby signaling to the market that low rates could be here to stay through 2022. Meanwhile, over the past week several large economy states, such as California, Texas, and Florida, all saw noticeable increases in COVID-19 infection and hospitalization rates. As the country continues the reopening process, this trend is worrisome and hopefully not the start of a longer and wider dynamic.
Empire Manufacturing: The survey reflects a very weak -28 figure, though not as weak as the preceding number for May. This is not surprising, given that New York has recently and gradually reopened for business.
Retail Sales: The survey for the latest reading on Retail Sales expects a positive reading for May, after the large decrease for April.
MBA Mortgage Applications: Mortgage applications portrayed a solid increase in home purchase and refinancing applications last week. Low mortgage rates, combined with pent-up demand from the spring and the reopening of States, should continue to allow positive momentum in this space of the economy.
Building Permits: Building permits are expected to reveal an increase from the previous reading; the month-over-month figure is also expected to be strong.
Housing Starts: Housing starts are also expected to reveal a rebound month-over-month.
Initial & Continuing Claims: Claims figures are expected to remain historically high but on a declining path, as businesses reopen and employees return to work.
Virtual FED Speaking Events: Various Fed speakers this week, highlighted by Chair Powell on June 16 (to the Senate panel), June 17 (to the House Financial Services panel) and June 19 (to the Youngstown Community event).
Key Market Trends
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CHART 1 UPPER LEFT
Source: Bloomberg. The UST yield curve this week underwent a swift U-turn lower from last week’s levels. With Covid-19 cases and hospitalizations on the rise in some states, stock/credit markets having relentlessly rallied in the past few months, and worrisome projections from the FOMC this past mid-week, perhaps investors re-assessed expectations; the result was a “risk-off” (stocks down, credit spreads wider) move in the markets. UST yields declined markedly week-over-week, although the very long-end lagged and is still higher than a month ago.
CHART 2 UPPER RIGHT
Source: Bloomberg. The current Fed Funds futures curve depicts a Fed “on hold” for a protracted period at rock-bottom levels. As of Friday afternoon, the Oct21 contract sat at 0%. While some of these contracts have intermittently traded below 0%, including again this past week, the Fed has indicated reluctance to consider nudging this baseline rate any lower than the present range. Cited reasons for this reluctance include the potentially chaotic impact to money market funds and the mixed results of negative rate regimes in other countries.
CHART 3 LOWER LEFT
Source: Bloomberg. The Fed’s “Dot Plot” of its members’ projections also portrays rates “on hold” for a long period and well into 2022. The Fed, in a sense, this week told the market that the current economic crisis is unlikely to quickly “go away”.
CHART 4 LOWER RIGHT
Source: Bloomberg; JP Morgan. This chart reveals the increasing presence of SOFR-based product in the FHLB-system issuance markets. Depicted is FHLB floating rate notes outstanding by month and index ($bn, LHS) vs. SOFR share of floating rate notes outstanding (%, RHS); the SOFR share is now over 50%. Important to keep in mind is that Libor-cessation is still on track for year-end 2021, as has been reinforced by regulators such as the UK’s Financial Conduct Authority and Financial Services Authority.
FHLBNY Advance Rates
Front- End Rates
Short-end Advance rates were 2 to 3 bps higher week-over-week. The week featured the usual heavy T-bill issuance and investor demand for short paper sagged, as evidenced by a another decrease in Government-Only MMF AUM the past week. Also, the Fed announced late in the week that it would raise the minimum bid in its repo operations and also move the operations to afternoons; this move essentially signals that markets have normalized and so the Fed can serve as more of a backstop resource.
Heavy T-Bill issuance will remain a theme. At this point, with short UST rates at rock-bottom levels, and the Fed likely on hold for a long period, rates may trade in a sideways pattern but potentially pressured upward if Government-Only funds continue to shed assets. With stocks having wobbled this past week, perhaps those outflows will subside.
Medium and longer-term Advance rates were 5 to 35 bps lower week-over-week, in a notable bull flattening shift and almost mirror image of last week’s move. See previous slide for more color on the move. It was also a favorable week for FHLB’s debt spreads, thereby helping the downtrend in our rates.
The upcoming week brings only a 20-year UST auction. With stocks running into resistance on the upside and a potentially slower corporate issuance calendar, term rates may trade steady or leak lower; however, the market has become more unpredictable in recent weeks. Attention remains focused on Covid-19 and, most importantly, how and where the country and economy can safely transition “back to work.
**SPA Feature: With rates at or near multi-year lows, it is a compelling juncture to use the Symmetrical feature on term advances. This feature offers the member a potential fee for the “in the money-ness” of their advance if/when the advance is ever prepaid at a later date. Please call the desk to discuss.
**Special Member Alert: The FHLB-NY recently announced a newly expanded and flexible Disaster Relief Fund (“DRF”) Advance program. The program offers discounted rate advances with maturities 1-mo and greater, in an effort to help members meet their needs. Additionally, the Bank has announced that PPP loans will be accepted as eligible collateral. Please call the desk with any questions.
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