Daily Market Color

September Rate Hike Odds Decrease Following Weak Retail and Production Data

Jeff Davenport

A few key economic indicators were released today, highlighted by US Retail Sales data which reported a -0.3% MoM move for August, a larger drop than the expected -0.1%.  Decreased automobile purchases served as the main driver to the disappointing figure.  Also coming in below forecasts, industrial production declined 0.4% for August compared to the 0.2% contraction that was expected.  With the Retail Sales and Industrial Production figures not matching consensuses, odds of a rate hike for next week fell below 20 percent.  Other data reported on the day included weekly jobless claims coming at 260,000 and an unchanged August PPI, both slightly lower than predictions.  The last major economic indicator for the week, CPI, will be reported tomorrow, where a rise of 0.1% is expected.          

Abroad, Retail Sales in England was reported as increasing 6.2% YoY, beating expectations.  The data trickled in on the same day that the Bank of England met and unanimously voted to hold interest rates steady at the nation’s historical low of 0.25%, in-line with estimates.  Additionally, the BoE pushed the nation’s growth forecast for the third quarter up to 0.3% from 0.1% after economic data over the past few weeks showed better than expected post-Brexit results.  However, the 0.3% figure remains half that of Q2, leading the BoE to keep the option for an additional rate cut in 2016 on the table.  The main U.K. index, FTSE, closed up nearly 1% for the day.

Swap markets received commentary today from Timothy Massad, chairman of the Commodity Futures Trading Commission (CFTC).  In his speech at the Annual OTC Derivatives Summit, Massad presented his recommendation to pause the drop in swap dealer de minimis threshold for one year, giving the CFTC more time to analyze data to determine the efficiency of the change.  As it stands currently, on December 31, 2017 the limit for the notional amount of swap dealing activity over the course of the year for to remain a non-swap dealer will decrease from $8 billion to $3 billion.  At that time, once a bank goes above the $3 billion threshold it will be forced to register as a swap dealer, which comes with the CFTC oversight and costly additional recordkeeping and documentation requirements.  Massad specifically cited the effect on smaller banks who use swaps as hedges to assist their commercial borrowers, in stating that many feel the drop to $3 billion should be removed completely.  With a phase-in period of one year, banks will be forced to monitor activity starting January 2017 as it will qualify for the first year in the new threshold.  The recommendation of a one-year delay will require backing from one of two sitting Commissioners of the CFTC in order to be instated.
All three major U.S. stock indexes are currently trading up between 1.0% and 1.5%.  Treasury yields/swap rates are down 2-3 bps in the front end and up 1-3 bps in the long end of the curve.   Oil prices dropped in the beginning of the session upon news of OPEC members Libya and Nigeria increasing their productions, but have since rebounded and are trading positive on the day, with WTI crude up just above 1% and Brent crude rising almost 2%.       

Jeff Davenport

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