Entries by halyard

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.

Halyard’s Weekly Wrap – 07/22/22

From an economic perspective, this has been a terrible week; especially so for the housing sector. The NAHB housing index, housing starts, and existing home sales all plunged, as did mortgage applications. The earnings release from D.R. Horton, the home builder, beat expectations, but the company said that sales are expected to slow, and cancelations rise as buyers are experiencing “payment shock.” After falling a quarter point last week, the average 30-year mortgage rate ticked back up to 5.625%, giving pause to perspective buyers.

Halyard’s Weekly Wrap – 07/15/22

Front end interest rate volatility remained elevated this week, with the market adding an additional 25bps increase in Fed funds post the record CPI print – January 2023 Fed Fund futures traded at a 3.49% rate a week ago, touched a 3.74% Thursday morning only to settle back to 3.50% by Friday afternoon. The shockingly high CPI print has been tempered by softer data. Headline retail sales point to a consumer muddling along – combatting higher energy prices by buying less elsewhere. The exceptions are restaurants, a slight bounce in vehicles and strength in online shopping. Overall real retail sales have fallen two months in a row. University of Michigan surveys released Friday showed a slight uptick in sentiment following June’s abysmal readings and also a slight downtick in longer term inflation expectations. The relief rally – data dispels fears of 100bps rate rise – leaves stocks up 1.7% on the day and off just 1% for the week.

Halyard’s Weekly Wrap – 07/08/22

Fed Governor Chris Waller “tipped his cards” on Thursday regarding this morning’s employment report, saying the “Robust labor market” gave him confidence in the strength of the economy. The report showed that the economy added 372,000 new jobs in June, well ahead of the 265,000 that was expected. Given the anecdotal weakness we’ve been witnessing, our expectation was that the jobs figure would disappoint. His comment on jobs was in addition to him saying that he favored another 75- basis point hike later this month. That rate hike recommendation was echoed by St. Louis Fed President James Bullard, and both are voters on the rate decision committee.

June 2022 – Monthly Commentary

As expected, the Consumer Price Index (CPI) in June registered the highest inflation in 40 years. Year-over-year the rate of price appreciation of the CPI came in at 9.1%. In reviewing the details of the report, the source of the inflation is broad-based. Even more troubling, recent surveys indicate that consumer expectations for future inflation are climbing.

Earlier this month the jobless report showed that the economy added 372,000 new jobs in June, well ahead of the 265,000 that was expected. Given the anecdotal weakness we’ve been witnessing, our expectation was that the jobs figure would disappoint. Contradicting the headline number, the household survey showed a decline in the labor force of 353,000 jobs. As we’ve explained previously, the two measures are usually directionally in agreement, but not always.

Halyard’s Weekly Wrap – 06/24/22

As if the investing environment couldn’t be more challenging, this week only served to further muddy the water. Fed Chairman Powell testified before Congress in what was once referred to as the Humphrey-Hawkins testimony. The testimony is mandated twice a year and the Chairman is tasked with justifying his dual mandate of keeping unemployment and inflation low. His testimony was mostly comments Congressmen don’t want to hear. Namely, acknowledging that rising interest rates poses the risk of a recession, and that the employment market is running “too hot.” In the perverse thinking of bond investors that was good news. The logic goes that If the Fed Chairman is thinking that the coming rate hikes could result in a recession, then that means that inflation will be coming down faster than they had hoped and, therefore, rates will need to be cut sooner than anticipated. Taking their cue from bond investors, the stock jockeys interpreted that logic as a signal to buy, hence the 6% rise in the S&P 500 off the low touched last week. Notably, Powell didn’t say anything at the testimony that would indicate that the committee has changed their mind about raising rates another 75 basis points at the end of July.

Halyard’s Weekly Wrap – 06/17/22

As we wrote last week, the May inflation report and the University of Michigan consumer sentiment surveys were worrisome indicators. So much so that on Monday the Fed leaked news to the media that they were going to raise rates 75 basis points at the coming meeting, instead of the 50 they’ve signaled since the May meeting. Chairman Powell admitted as much at the post-FOMC press conference. In addition to that hawkish turn, the committee further communicated that they expect the overnight rate to end 2022 at 3.4% and end 2023 at 3.8%. Moreover, to drive home his transformation from Trump lapdog to Volker incarnate, he later said that his commitment to reining in inflation was “unconditional.” Presumably, that means that he doesn’t care how the equity market reacts. We’re not fully convinced of that commitment, but time will tell.