Halyard’s Weekly Wrap – 08/19/22

Economic data released on Monday showed weakness in manufacturing in the New York region and continued slowdown in national housing activity as seen in the national association of home builders index, housing starts and building permit data. This led to short covering of trades betting on higher interest rates. The short covering was temporary as industrial production and core retail sales surprised slightly to the upside. Economists were looking for signs that the slowdown in housing and high and persistent inflation was weighing on spending. Stripping out auto sales and gasoline, retail sales posted a decent month. The headline, which includes autos and gas sales was flat month over month. CPI for July was also flat month over month, which indicates, that the consumer is buying less gasoline and motor vehicles while spending more on other goods and services. There was also a sharp uptick in non—store retail sales (online shopping). The take away is that high inflation has caused some demand destruction in certain categories but overall, the consume held up.

Halyard’s Weekly Wrap – 08/12/22

The doldrums are finally upon us! Last Friday’s strong employment report assured worried investors that two straight quarters of economic contraction wouldn’t result in a “hard landing” and this week’s CPI offered hope that the inflation impulse has passed. With that, investors can relaxed and enjoy the last few weeks of summer.

The 0.00% monthly change in inflation was a welcome reprieve from what we’ve witnessed for nearly two years now. But we’re hesitant to declare victory in the Fed’s war on inflation. There’s still an enormous amount of excess liquidity in the system and the Fed’s quantitative tightening has been slow to drain the excess. The Fed’s reverse repo operation, the de facto add-on to the Treasury Bill market, totaled $2.199 trillion at Thursday’s operation, just a few billion below the peak reached earlier this year. And the T-Bill market itself continues to flash warning signs, with yield levels well below the overnight rate and bid/ask spreads of as much as 11 basis points, in some cases. Raising interest rates will slow some interest sensitive sectors, such as home and automobile sales, but the Fed needs to drain liquidity and they’ve barely scratched the surface.

July 2022 – Monthly Commentary

The S&P 500 has recovered from its early summer swoon and is currently trading midway between the high and low print for the last year, supported by the two most recent economic wayposts. The July employment report and the consumer price index (CPI), were both better than investors had forecast, indicating that the Fed may not need to be as aggressive in tightening policy as thought just a month ago.

Following a mixed June employment report, the July tally blew past all expectations. Coming in at 528,000 new jobs added, the report more than doubled the consensus expectation of 250,000 and exceeded the highest expectation of 325,000. Moreover, the details were equally eye popping, with average hourly earnings up 5.2%, year-over-year, and the unemployment rate ticking down to 3.5%, equaling the low touched on September 2019. The bond market didn’t like any of it. The yield curve that placidly drifted below 3% recently, convulsed back above that measure on the day. Month to date, the 2-year note is 30 basis points higher, and the 2-year/30-year interest rate spread went negative for the second time this year.

Halyard’s Weekly Wrap – 08/05/22

We didn’t see that coming! On the back of the mixed June employment report, the July tally blew past all expectations. Coming in at 528,000 new jobs added, the report more than doubled the consensus expectation of 250,000 and exceeded the highest expectation of 325,000. Moreover, the details were equally eye popping, with average hourly earnings up 5.2%, year-over-year, and the unemployment rate ticking down to 3.5%, equaling the low touched on September 2019. The bond market didn’t like any of it. The yield curve that placidly drifted below 3% last week, convulsed back above that measure today. For the week, the 2-year note is 30 basis points higher, and the 2-year/30-year interest rate spread went negative for the second time this year, closing the week out decidedly inverted at -17 basis points.

Halyard’s Weekly Wrap – 07/29/22

According to Morgan Stanley “2Q data would mark a technical recession, not an economic one”. The Wall Street firm had forecast that Q2 GDP would come in at +1.0 annualized, so they needed an excuse for their wide miss. In fact, the print was -0.9%. Economic 101 teaches that two consecutive quarters of economic contraction are a recession. Despite that, the Biden administration is saying that it’s not a recession, and points to the jobs market as proof. We agree that the jobs market remains quite healthy, but there’s more to GDP than simply income.