Halyard’s Weekly Wrap – 4/19/24

4/19/24 – Was Powell Born a Ramblin’ Man?

The red-hot economic data continued this week with the release of March Retail Sales.  The report showed that retail sales rose 1.1% over the previous month, more than double what was expected.  February retail sales were revised to a 0.6% monthly gain from the 0.3% that was first reported.  The gains were broad based and have some economists thinking that the Q1 GDP forecast may be too low.  The estimate last Friday was for 2.1% growth, but the consensus thinking as of this morning is 2.5%.

The one sector where consumers were not spending last month was housing.  Housing has been in a slump since the Fed began raising interest rates, causing affordability of home ownership to slip away from most first-time home buyers.  The trend had shown signs of bottoming at the end of last year as the forecast for lower interest rates piqued buyer interest.  But that reversed in March as it became apparent that interest rates will remain stubbornly high.  Current 30-year mortgage rates have again topped 7% which has been a level of deterrence to home buyers.

The various Fed speakers this week reinforced the view that we won’t see three rate cuts this year and traders reacted negatively when New York Fed President John Williams mentioned another rate hike, which he assured listeners was not his base case.  Even that mention leads us to believe it’s in the back of his mind and may be discussed at the next FOMC meeting.

As an aside, we read through the Federal Reserve’s beige book on Wednesday and were befuddled by its conclusions.  The beige book qualitatively aggregates economic conditions across the 12 Federal Reserve districts by surveying a diverse population.  The conclusion was “ten out of twelve districts experienced slight to modest growth,” and “consumer spending barely increased at all.”  Indeed, looking through the summaries of each of the districts, the conclusion did not jibe with what we’re seeing in the “hard” data.  We’ve concluded that it’s a misperception of what survey participants believe is happening in the economy versus what is actually happening.

Next week, in addition to the first look at Q1 GDP, the government will release data on durable goods and home sales, with the University of Michigan surveys rounding out the week.  The last survey of 12-month forward inflation ticked up 0.2% to 3.1%, an unwelcome sign of consumer psychology on where prices are heading.



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Halyard’s Weekly Wrap – 4/12/24

If you’re thinking there has been a sea change in expectations this week, it’s because there has been. The March Consumer Price Index slammed the door on any hopes of a near-term rate cut with the year-over-year core CPI rising 3.8%. The CPI seems to have settled in at the 3.8% annual rate which is a level that is too high for the Fed to cut interest rates anytime soon. Reflecting that, many of the “Street” economists have withdrawn their forecast for a June rate hike and the possibility of two additional cuts this year and have now taken the safe forecast of one rate cut this year coming at the December meeting. Indeed, the Fed Fund futures have priced in a singular rate cut in the December contract.

Halyard’s Weekly Wrap – 4/5/24

The Bond market continued to reprice the yield curve this week. Driven by economic data that showed the US economy is still firm despite higher interest rates. Manufacturing and Service surveys indicated expansion – the first such reading for Manufacturing since September of 2022. On Friday, the Non-farm payroll release created a seismic move in rates as the report showed 303,000 new jobs for the month versus expectations of +214,000. The 3-month average of job gains is 276,000 – eclipsing last year’s average gain of 242,000. The unemployment rate stood firm at 3.8%.

March 2024 – Monthly Commentary

March rounded out a quarter in which the equity market was cheered by the prospect of lower interest rates despite rising rates across the yield curve. Members of the open market committee, the arbiters of interest rate policy, continue to espouse three rate hikes this year despite continued solid economic growth. Given that backdrop, it appears that Chairman Powell and his fellow committee members are as wrong on their interest rate forecast as they were when they tried to calm concerns when inflation first appeared three years ago. The calming words that inflation would prove “transient” quickly devolved into the worse inflationary impulse in decades. Then at the December 2023 FOMC meeting the committee forecast that the rate rising cycle was not only over but expected to reverse much of the rate rise over the coming two years, with the first rate cut coming in March 2024.

Halyard’s Weekly Wrap – 3/29/24

Though the minutes of the recent FOMC meeting reconfirmed the committee’s expectation that they’ll cut the overnight rate three times this year, market consensus is moving away from that expectation. Fed fund futures had priced in as many as five rates cut by December at the start of this year. Instead, the future now implies about 60 basis points of rate cuts by the end of this year.

Halyard’s Weekly Wrap – 3/22/24

As expected, the FOMC left the Fed Funds corridor unchanged on Wednesday. Mildly surprising to us though, their economic forecast continues to indicate that they expect to cut the overnight rate three times this year. As we’ve written on numerous occasions, the job market remains robust, and the consumer price index has stabilized at the mid-3% level, well above the Fed’s stated target. The question being asked, is there an imminent threat to economic growth that the Fed is aware of, but the rest of the investing community is not? Especially since a popular financial conditions indicator, which aggregates broad financial conditions such as interest rates, equity prices, and credit spread is showing that financial conditions have eased since last fall. Why then is the Fed threatening to ease policy?

Halyard’s Weekly Wrap – 3/15/24

The bullish tone on which the bond market closed last week has completely reversed and is closing this week with a decidedly bearish resolve. The hope had been that the inflation measures this week would show further progress toward the Fed’s 2% target. That didn’t happen. Instead, the Consumer and Producer price indices both moved higher on a month-over-month basis in February. The core CPI index was 0.4% higher than the January measure, rounding to roughly 5.0%, a far cry from the Fed’s target.

Halyard’s Weekly Wrap – 3/8/24

At first glance the employment report for February was surprisingly strong. The expectation was that the economy would add 200,000 new jobs, up from an expected 188,00 last week. The actual change in payroll was 275,000. The year-over-year change in average hourly earnings was 4.3%, 0.1% lower than it registered last month but still an impressive uptick.

Halyard’s Weekly Wrap – 3/1/24

This week proved disappointing in that each day was jammed with economic data and a parade of Fed speakers and the market barely budged. After last week’s range-bound trading we felt certain that interest rates would break out of their recent band. The best that traders could manage was a rally in the 2-year note taking the yield-to-maturity of that issue down to 4.53%, the lowest yield in nearly three weeks.