Trump’s Covid Diagnosis Won’t Change The Rate Dynamic

Is it time to terminate your interest rate swap? With all the debt refinancing and restructurings of late, we’re being flooded with calls from borrowers for help with terminating or amending interest rate swaps, defeasance and yield maintenance. For a high-level insight of what’s involved and the potholes to avoid, look for our monthly publication on the topic, DL Monitor, late this week.

America’s jobs rebound lost steam in September. America’s economy created fewer new jobs than expected last month, though the percentage of those unemployed dropped. Economists had expected about 850k positions to be filled in September (notably lower than August’s 1.49M print), but only 661k actually were when all was said and done. Meanwhile, the unemployment rate declined to 7.9% in September from 8.4% the prior month, down from a peak of 14.7% in April. In addition to the decline in the unemployment rate, upward revisions to the prior two months’ data added 145,000 jobs to the nation’s jobs total.

Our take: In what is historically the single most important piece of economic data for interest rates, September’s job report clearly showed a continuation of the downward trend in job creation, which has been slowing since June, and that the easy days for post-pandemic job growth are behind us. For some perspective, we’re only halfway there: America’s jobs engine has now created a total of 11.4 million new jobs since the onset of the pandemic-driven lockdowns, only half of the 22 million jobs lost over the March-April period. Most troubling is the number of permanent job losses, which rose in September to 3.8M from 3.4M.

On top of that, when peeking into the jobs report’s detail on consumer wages, there remains a significant gap between the income levels now and where they were pre-crisis. It is important to remember that consumer activity accounts for around 70% of total economic activity, and since it’s tough to buy new shiny things when you don’t have a job or when you’re income is well below where it was at the start of the year, combined with rising COVID-19 intensity in many parts of the country, it’s likely that further sizable job and wage gains in the months ahead will be harder to come by. It’s a situation that begs for an additional round of well-targeted fiscal aid to promote continued momentum in consumer spending and a faster economic recovery in 2021.

Trump’s COVID-19 diagnosis sparks new life into fiscal-stimulus talks. Curious what the President’s health in the days ahead will ultimately do to interest rates? Look no further than the market’s reaction on Friday. Treasury yields initially fell (prices rallied) in Asia on Trump’s diagnosis, since it adds to the political uncertainty ahead of the election, spurring investors to seek safe havens. But the rise in yields stopped well sort of a big move after reports that Trump’s symptoms were mild and on speculation that the new dynamic might jumpstart virus-relief talks in Congress and the Senate. The slowing jobs situation only raised the stakes for Congress further to actually get something done, and fast. At the end of the day though, we doubt that Trump’s illness will be the catalyst that draws House Democrats and Senate Republicans closer together, rather it will be escalating fears of a declining economy. Further, we doubt a fiscal stimulus deal will get done before the election.

The last tally of where the negotiations stand showed US Treasury Secretary Steve Mnuchin offering a plan with a price tag totaling $1.6 trillion in additional spending while House Speaker Nancy Pelosi’s offer stood at $2.2 trillion. After the two officials failed to reach agreement on a plan, the House voted to approve the $2.2 trillion, but it is widely believed that the Senate is unlikely to follow suit. Why it matters: The alphabet soup of stalled fiscal stimulus talks, an ill but recovering President and the likelihood of a contested election all equate to more volatility in rates in the days and weeks ahead, which means more expensive rate caps and interest rate swaptions.