Halyard’s Weekly Wrap – 10/01/21

Fundamentals took a back seat to political in-fighting this week as the Republicans made it clear that they were going to do precious little to assist the Democrat’s goal of lifting the debt ceiling, keeping the government open for business, or passing Biden’s $3.5 trillion social stimulus. Interest rates moved higher across the curve as the uncertainty of fiscal policy spooked bond investors. The new 2-year note auction that was held on Monday was described by one pundit as “gruesome”, given the below average bid-to-cover ratio, and the yield at which it cleared, which was nearly a basis point above the yield asked at auction time. Following the auction, the yield-to-maturity of the 2-year note rose to 0.31%, before drifting back down to 0.266% to close out the week. That’s nearly double where the note traded last summer! Stocks fared worse, with the S&P 500 trading down about 2.5% for the week.

It’s no secret that inflation has become a national concern and even the Federal Reserve is backing away, somewhat, from describing the price action as transitory. But the most amusing evidence of the upward creep of prices is the retailer Dollar Tree’s announcement this week that they will no longer be able to offer every item in the store for one dollar or less. One analyst pointed out that the company making such a momentous announcement mid-quarter must mean that rising costs were rapidly eroding their profitability. That seems likely, but we’re willing to bet that should their cost structure come back down, their new pricing strategy will not.

On Friday, General Motors quantified the damage that the chip shortage is doing to the auto industry, reporting that their third quarter sales fell 32% when compared to the same quarter in 2020. It’s expected that the other manufacturers will report similar sales results as computer chips remain hard to get. Looking ahead to mid-month, we expect that the auto sales drop off will hit headline retail sales. The early consensus is the headline measure will fall -0.2% versus August’s 0.7%. That expectation is likely to fall as we get closer to the September 15th release date.