Entries by halyard

February 2022 – Monthly Commentary

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The February 24 invasion of Ukraine by Russia has resulted in heightened volatility as bid/ask spreads have widened and liquidity has dried up. President Biden’s decision to punish Russia’s aggression by halting purchases of Russian fossil fuel has caused the price of a barrel of crude oil sky-rocket. West Texas Intermediate briefly touched $130 a barrel on March 7th before settling in around $106 a barrel at the time of this writing. The rise in oil is having a direct impact, as one would expect, on gas prices. While the general population is aware of the dislocations in the capital markets, the rise in the price of gasoline is a direct hit to their wallet and one that has the average citizen worried. Economic forecasters are attempting to back into the price of a gallon of gasoline should the Russian oil ban become a sustained policy, and their forecasts are frightening. Estimates are as high as $150 to $200 per barrel of oil with gasoline topping out at $8 to $10 per gallon. Should the price of a gallon of gas rise to that level, we’re fairly confident that the U.S. economy will be in a recession. As it is, the Atlanta Federal Reserve’s GDP calculator is forecasting 0.041% economic growth in Q1 2022. We wonder how the investing public is going to react to 0% economic growth after enjoying 6 quarters of “eye-popping” economic growth fueled by emergency COVID stimulus. The first estimate of that growth comes at the end of April so we have plenty to worry about between now and then.

Halyard’s Weekly Wrap – 03/04/22

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The heighted volatility we saw last week intensified this week as bid/ask spreads widened and liquidity has begun to dry up. Volatility was elevated across the board with crude oil continuing to sky-rocket, developed foreign exchange showing marked weakness versus the U.S. dollar and equity volatility, as measured by the VIX index, closing the week at the high end of the recent range. Of course, the panicky market is a result of Russia’s declaration of war against the Ukraine. While the general population is aware of the market dislocations, the rise in the price of gasoline is a direct hit to their wallet and one that has the average citizen worried. As we close out the week, economic forecasters are attempting to back into the price of a gallon of gasoline should the global economy halt the import of Russian oil, and their forecasts are frightening. Estimates are as high as $150 to $200 per barrel of oil with gasoline topping out at $8 to $10 per gallon. Should the precious commodity rise to that level, we’re fairly confident that the U.S. economy will be in a recession. As it is, the Atlanta Federal Reserve’s GDP calculator is forecasting 0.041% economic growth in Q1 2022. We wonder how the investing public is going to react to 0% economic growth after enjoying 6 quarters of “eye-popping” economic growth fueled by emergency COVID stimulus. The first estimate of that growth comes at the end of April so we have plenty to worry about between now and then.

Halyard’s Weekly Wrap – 02/25/22

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So…What a quiet week in the capital markets! As of now, bond yields have drifted higher and the yield curve flatter as investors contemplate the Fed’s upcoming rate hikes. Since last Friday the 2 year US Treasury Note yield has risen 14 basis points to round out the week at 1.61%, while the yield to maturity on the 10 year US Treasury Note rose 6bps to close Friday out at 1.99%. Stocks, as measured by the S&P500, rose for the week – closing around 60bps higher. Let’s digest that for a minute. Wait, Russia invaded the Ukraine on Thursday. Putin made his motive clear – demilitarize the Ukraine. The shock that move sent through the capital markets found the S&P down nearly 3% that day making its peak to trough (from Jan 4th high) down 14%. Safe haven assets rose – gold, and US Treasury Bond prices in particular. The money market space removed much of the probability of a 50bps move higher in fed funds. World leaders responded with sanctions and the Ukraine is fighting back. Apparently, that was enough for risk assets to rebound and put Putin’s actions in the review mirror. The S&P500 is up more than 6% from the low print this week.

Halyard’s Weekly Wrap – 02/18/22

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The front end of the interest rate markets have priced in between 0.75% and 1.00% of tightening over the past several months. The one year US Treasury Bill has risen to 1.0% from 20bps in early December. The Two year US Treasury Note similarly has increased to 1.48% from around 50bps in December. The Two year note briefly traded above 1.60% at the end of last week as St. Louis Fed President Bullard began pounding the table for more immediate policy changes than the market had been expecting based on Powell’s measured and deliberate pace. Yields have fallen a touch since then – being walked lower by Ukraine – Russia geopolitical risks and the release of the FOMC January meeting’s minutes, which showed an inclination to move faster but no hint of an imminent 50 bps increase.

Halyard’s Weekly Wrap – 02/11/22

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The biggest surprise this week wasn’t the shocking 7.5% rise in the Consumer Price Index over the last 12 months; although that was certainly an unpleasant surprise. Instead, the surprise is how quiet the markets are finishing the week. On the back of the outsized CPI, traders began to “whisper” that the Fed would preemptively raise rates Friday morning at 8:00 a.m. Validating that speculation, St. Louis Fed President Bullard was quoted as saying that he supported a 50 basis point rate hike in March and would like to see the Fed Funds rate 100 basis points higher by June. One would expect that prior to making such a bold forecast he would have had a conversation with the Chairman so as to not send a misleading message to the markets. With that in mind the markets took his message seriously, with the two-year note 20 basis points higher and the S&P 500 nearly 90 points lower on the day. We arrived at our desks prepared for a day of carnage on Friday morning, only to find a the Fed said that the Central Bank doesn’t favor a half point hike or an emergency move. Apparently, Bullard didn’t have the blessing of the Chairman to make such a statement?

January 2022 – Monthly Commentary

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Without a doubt, the Federal Reserve should have raised the overnight interest rate interest rate today, February 10th. The Bureau of Labor Statistics (BLS) released the January inflation report and, again, it shocked to the upside. Consensus expectation was that prices would have risen 7.3% year-over-year. Instead, prices rose 7.5% over last year’s basket. The Fed has 2% as their stated target for inflation and when inflation began to exceed that target last year they revised the mandate somewhat to say 2%, on average, given the vagaries of the economic cycle.

Parsing the individual components of the inflation report, the only category that did not exceed 2% was education, rising 1.7% for the year. At the opposite side of the spectrum, energy was up 27%, and the gasoline subcomponent was up 40% compared to last year. For the same period, new car prices rose 12.2% and used car prices rose a whopping 40.5%.

Halyard’s Weekly Wrap – 02/04/22

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The January employment report did little to quell the frazzled nerves of investors. Following the ADP employment number, which showed a contraction of -301,000 on Wednesday, the street was prepared for a negative non-farm payroll print this morning. Especially given that Labor Secretary Marty Walsh and White House Press Secretary Jen Psaki delivered warnings that the report may be a bad one due to the spike in virus cases. In fact, the BLS said the economy added 467,000 new jobs for the month, a number greater than any of the 23 economic forecasters surveyed by Bloomberg. Anyone who watches economic data long enough knows that the devil is always in the detail, and this report was no different. Apparently, looking through to the seasonal adjustment employed to “smooth” the series, the actual number would have been much closer to trend. Moreover, the BLS did their 10-year lookback adjustment in January, which further muddied the final number.

Halyard’s Weekly Wrap – 01/28/22

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As economist debate the message Chairman Powell delivered to investors on Wednesday, the fact remains that the Fed continues to pursue emergency monetary policy. For evidence, one need look no further than the bi-weekly System Open Market Account Holdings report that was released this past Wednesday. The report, essentially the Fed’s balance sheet, has swelled to $8.3 trillion, up from $7.74 Trillion on September 1st.

Halyard’s Weekly Wrap – 01/21/22

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Happily, there’s been a dearth of Central Bank speeches this week, and that’s been mostly good for the bond market. Last week the investment community worked to digest the possibility of four rate hikes this year. We remain skeptical that the Fed is able to endure the pressure such a string of rate hikes would exact on the equity market. In fact, we wonder how the fed is feeling about the 7% year-to-date drawdown of the S&P 500. At any rate, we’ll know next Wednesday afternoon as the Fed concludes their first Open Market Committee meeting of the new year. As we’ve written recently, historically the Fed, having admitted that inflation has proven more stubborn than anticipated and with an economy going gangbusters, would tighten policy immediately.

Halyard’s Weekly Wrap – 01/07/22

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For the second month in a row the employment reports told two conflicting stories. The establishment survey came in at less than half of consensus expectation at 199,000 new jobs, while the household measure registered 651,000 new jobs in the month. That measure was enough to push the unemployment rate down to 3.9%, and within a “chip shot” of the post financial crisis low of 3.5%.  That comes on the back of the surprisingly hawkish minutes of the December 15th Fed meeting. Not only did the minutes solidly indicate a March liftoff in Fed Funds, the committee apparently had a meaningful discussion on the appropriate size of the Fed balance sheet under normal circumstances and how fast they would allow a runoff of maturing securities.