From PNC’s Trader Desk

In this series, the Capital Markets team at PNC provides analysis of trends, news, and activity in the market from the previous quarter and looks ahead to what may be on the horizon.

Foreign Exchange^[1]

As noted earlier in the year, interest rate expectations continue to be the dominant factor in the FX market. Global elections have contributed to currency specific volatility, specifically in Mexico and India. The U.S. elections will have influence as well, but the market perception of impending central bank moves will have a larger effect. The less than stellar jobs report in early August sparked calls for an intra-meeting Fed cut, as well as a total of 125 basis points in cuts over the last 3 Fed meetings. However, market unrest has been replaced by a sense of calm. Fed Chairman Jerome Powell has signaled the Fed’s intention to unwind tight monetary conditions, and the currency market has responded in an orderly fashion. It may be that the sooner central banks get on with their normalization of interest rates, the better it will be for their respective economies and currency. The Canadian dollar has strengthened despite two rate cuts already, with another three cuts expected over 2024.

It is important to stay ahead of potential event risk, including political uncertainty and central bank divergence. The FX team with PNC Capital Markets can help design hedging strategies to protect against sudden moves.

Derivatives^[2]

The Federal Reserve pivot began in earnest late August when Chairman Jerome Powell declared “the time has come for policy to adjust” in his speech at the Jackson Hole Symposium. Although yields on Treasuries are down dramatically in the third quarter (2-years -0.83%, 5-years -0.73%, 10-years -0.58%), most of the move came before Powell’s comments, as markets have been expecting such an announcement. These expectations have translated into the markets pricing in a fairly aggressive rate cutting regime from the Fed. Currently, there are four cuts priced into 2024, even though there are only three FOMC meetings left in the year. With the market pricing in a higher probability of rate cuts, fixed rates have come down, allowing borrowers to convert their floating rates to fixed rates at more attractive levels.

Tax-Exempt Fixed Income^[3]

The tax-exempt market continues to be dominated by heavier new issue supply. The average so far this year has been close to 10 billion a week, which is a 30-35% increase over last year. Some of this increased supply is the result of issuers’ desire to avoid volatility around the presidential election. Between the overall supply increase and the recent trend to lower rates in the treasury space, tax-exempt ratios have gotten cheaper. Treasurys were around 65% for much of this year in the shorter/intermediate part of the curve but have recently started to trend to 70%-plus. The inverted yield curve continues to be a cause for concern in the overall investor community. As the presidential and congressional elections approach, potential tax law changes could affect the demand for tax-exempt products.

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Important Legal Disclosures and Information

1. Foreign Exchange is a PNC Bank product.

2. Derivatives are sold through PNC Bank.

3. Fixed Income products are sold through PNC Capital Markets LLC.

These materials are furnished for the use of PNC and its clients and do not constitute the provision of investment, legal, or tax advice to any person. They are not prepared with respect to the specific investment objectives, financial situation, or particular needs of any person. Use of these materials is dependent upon the judgment and analysis applied by duly authorized investment personnel who consider a client’s individual account circumstances. Persons reading these materials should consult with their PNC account representative regarding the appropriateness of investing in any securities or adopting any investment strategies discussed or recommended herein and should understand that statements regarding future prospects may not be realized. The information contained herein was obtained from sources deemed reliable. Such information is not guaranteed as to its accuracy, timeliness, or completeness by PNC. The information contained and the opinions expressed herein are subject to change without notice. Past performance is no guarantee of future results. Neither the information presented nor any opinion expressed herein constitutes an offer to buy or sell, nor a recommendation to buy or sell, any security or financial instrument. Accounts managed by PNC and its affiliates may take positions from time to time in securities recommended and followed by PNC affiliates. Securities are not bank deposits, nor are they backed or guaranteed by PNC or any of its affiliates, and are not issued by, insured by, guaranteed by, or obligations of the FDIC or the Federal Reserve Board. Securities involve investment risks, including possible loss of principal.

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PNC Capital Markets LLC ("PNCCM"), member FINRA and SIPC, is a wholly owned subsidiary of The PNC Financial Services Group, Inc. (“PNC”) and affiliate of PNC Bank, National Association (“PNC Bank”). PNCCM is not a bank or thrift, but rather, it is a separate and distinct corporate entity from its bank affiliate.

This document is for informational purposes only. No part of this document may be reproduced in any manner without the prior written permission of PNCCM. The information contained herein is based on information PNCCM believes to be reliable and accurate, however, no representation is being made that this document is accurate or complete and it should not be relied upon as such. Neither PNCCM nor its affiliates make any guaranty or warranty as to the accuracy or completeness of the data set forth herein. Opinions expressed herein are subject to change without notice.

PNC Capital Markets is the marketing name used for investment banking and capital markets activities conducted by PNC through its subsidiaries PNC Bank and PNCCM. Securities underwriting, sales and trading services are provided by PNCCM. Foreign exchange and derivative products are obligations of PNC Bank, National Association.

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From PNC’s Trading Desks

Foreign Exchange[1]

Derivatives[2]