Published September 7, 2018 / In Weekly Market Updates
Last Week's Market Moves
The August jobs report was released today. Nonfarm payrolls rose 201,000 from the prior month, exceeding the forecast of 190,000 jobs. The unemployment rate was unchanged at 3.9 percent, still near the lowest levels since the 1960's. What stands out in this report was American wages unexpectedly climbed last month by the most since the recession ended in 2009. Average hourly earnings for private workers increased 2.9%, exceeding all estimates. Treasury yields and the dollar jumped after the report, while the equities market opened lower with the Dow Jones and S&P Index down slightly.
With the U.S economy essentially at full employment and strong wage growth, expect the Federal Reserve to stay on track to increase interest rates this month and making another hike in December more likely.
Today's 1 month LIBOR re-set is 2.12%, that puts the premium or cost to hedge 10 year monthly pay fixed rate loans at 82bps - an attractive price to lock in 10 year loan spread protection. Typically this cost to hedge averages greater than 150bps. As the curve continues to flatten we expect this premium to tighten further.
What to Look for This Week
Economic reports to watch next week include the CPI Index, Retail Sales, Industrial Production, Business Inventories and the Consumer Sentiment Index.
It's hurricane season so we will also be keeping at eye out for Hurricane Florence. Although the storm is currently over 1,800 miles away from the U.S. mainland, hurricane forecast models have shifted the track of the storm westward over the last couple of days. The European model simulations are now tracking the storm on a path placing it very close to the east coast which could potentially impact the financial markets.
Quotes of the Week we like:
"Economics is extremely useful as a form of employment for economists."
"In economics, the majority is always wrong"
John Kenneth Galbraith
1-month LIBOR Swap Rates**
|3 Years||Bullet||2.87%||- 1 bp|
|5 Years||Bullet||2.88%||- 2 bp|
|7 Years||Bullet||2.89%||- 1 bp|
|10 Years||Bullet||2.94%||-2 bp|
|12 Years||Bullet||2.96%||No change|
|15 Year||Bullet||2.98%||No change|
|20 Year||Bullet||3.00%||+ 2 bp|
Move signifies change in swap rates or treasuries since 8/30/2018
|2 Years||2.63%||- 1 bp|
|3 Years||2.70%||- 1 bp|
|5 Years||2.74%||- 1 bp|
|10 Years||2.87%||- 3 bp|
|30 Years||3.05%||+ 4 bp|
**Note: Rates above are mid-market swap rates as of NY market close 9/6/2018. All rates are subject to change. Dealer pricing may include additional swap fees, contact PRM for swap pricing analysis and a detailed report on pricing, pre-payment risk and swap fees.
Disclaimer: The purpose of this communication is to provide general information and estimates as of swap pricing for indicative purposes only. To obtain an independent swap quote and swap risk evaluations for a specific financing please call PRM Swap Desk with the terms of the proposed transaction. PRM offers independent pricing for interest rate swaps, caps, floors, swaptions as well as analysis of swap, fixed rate loan and insurance loan pre-payment risk.