Rates Trade Higher as Unemployment Rate Drops to 7.9%

US equities fall, rates rise on news the President tested positive for COVID-19. Markets woke up to a 1:00 AM tweet from the President stating that he has tested positive for COVID-19. The news throws a serious wrench into stimulus negotiations and could have broader implications for the upcoming presidential election as well. The DJIA and S&P 500 are 0.70% and 1.31% lower to start the day respectively while the VIX or “Fear Index” ticked higher to 28.6. Meanwhile, this morning’s nonfarm payrolls report missed expectations for the first time in five months- the economy adding only 661,000 jobs vs. estimates that had called for an increase of 860,000. The unemployment rate dropped more than expected, but almost entirely due to a drop in labor force participation which fell to 61.4%. While swap rates and Treasury yields initially followed risk assets lower, rates are now higher on the day- the 10-year Treasury yield sitting up 1bp at 0.686%.

FX Friday.  The dollar rose slightly heading into Friday on continuing investor doubts regarding any agreement on the US stimulus package as the election nears, having then dropped on the news of President Trump’s positive COVID test. Although the House of Representatives passed the $2.2 trillion coronavirus bill by a thin 214-207 vote tally,  Speaker Pelosi and Treasury Secretary Mnuchin continue to grapple on last minute compromises for the next round of aid, which would include another $1200 check and $600 unemployment extension out to January 2021. Even with the slight dollar rise, the dollar is on the verge of posting its softest week in a month, which is about 0.7%, with continued uncertainty in the US as the election approaches and markets monitor Trump’s recovery from the virus.  Across the pond, the Sterling’s levels ebbed and flowed in response to different shades of Brexit related news. The pound sprung from its Thursday pre US opening low of 1.2822, hitting a high of 1.2978 amid some early reports of a ‘landing zone’ for state aid. A few hours later, a EU official disregarded the tweet, calling it ‘unfounded UK spin’. This type of movement is constantly exacerbated in part to the UK and EU nearing the end of their scheduled trade talks before bloc leaders assess negotiation progress in mid-October. Investors will continue to watch and be sensitive to headlines as the Brexit cutoff approaches.  Meanwhile, the yuan’s gradual strength has been drawing the attention of investors as a haven against volatility, ending Q3 with its biggest gain in a dozen years, 3.8%. China’s success in controlling the coronavirus and managing their economic recovery has attracted investors and has added to speculation as a new currency shelter for the risk-averse. While the PBOC will still control the yuan’s exchange rate versus the G10 and how much money flows in and out of the country, those same measures have steadied the yuan amid volatility everywhere else.

LIBOR Transition Update.  ISDA’s LIBOR Fallback Protocol has received a positive business review from the Department of Justice (DOJ) on October 1st.  ISDA will now disclose the DOJ’s letter to competition authorities in other jurisdictions for final review.  In light of the recent developments for final Fallback Protocol approval, ISDA has updated its target timing for fallback implementation.  While we await ISDA’s Benchmark Reform changes, banks should continue to work on their LIBOR transition plans and consider proactively amending LIBOR-based instruments ahead of a cessation event.