Entries by halyard

Halyard’s Weekly Wrap – 1/5/24

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The first week of the new year had been a quiet one until the employment report was released this morning. The headline non-farm payrolls surprised to the upside, with 216,000 new jobs added to the workforce, and the unemployment rate falling to 3.7%. At first glance the report was a solid one and the bond market immediately sold off. However, digging into the details revealed that it was not as robust as the headline suggested. Glaringly, household employment fell 683,000; the biggest drop since April 2020 when COVID crushed employment for much of the workforce. It’s not unusual for the non-farm and the household reports to deviate, but an 899,000 deviation leads us to conclude that one or the other will be significantly revised. Later this morning, the Institute for Supply Management (ISM) reported a sharp drop in their services employment survey. Again, the drop was the sharpest since April 2020. Investors seem to have interpreted the combined reports as offering a solid backdrop for the Fed’s plan to cut rates this year.

Halyard’s Year End Wrap – 12/31/23

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It’s been a remarkable year in the capital markets! Last December, year-over-year consumer price inflation was running 6.5% and the Federal Reserve was solidly in “higher for longer” mode with the committee prepared to continue to raise rates to quell inflation. The ten-year Treasury opened 2023 yielding 4.48%, ticked up to a high of 4.65% early in the year, before ultimately settling at 3.88%. The Fed communication has changed dramatically in the last 12 months. They dropped the higher for longer mantra this month, instead communicating that they anticipate three rate cuts in the coming year. Let’s hope they’re not premature in their abrupt policy change. By several measures, the economy continues to run hot, especially employment. It has become clear that there’s a worker shortage in the United States. The unemployment rate in November was 3.7%, just above the all-time low. The Fed usually doesn’t cut rates when unemployment is near a cycle low. But this Fed has proved that they have no interest in any rules-based policy.

Halyard’s Weekly Wrap – 12/22/23

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The Euphoria from last week’s news that the Fed was done raising interest rates and expects to cut rates by 75 basis points next year continued into this week. In anticipation of those cuts, the entire yield curve has priced approximately 100 basis points lower. The knock-on effects can be found almost everywhere; the S&P 500 is less than 1.0% off an all-time high, mortgage rates are back below 7.0%, and consumer confidence as measured by the Conference Board’s present situation index is skyrocketing. But we wonder if that euphoria is unwarranted. After all, the move lower in rates is an easing of financial conditions, coming while year-over-year core CPI is 4% and pressure for higher wages is unrelenting.

February 2024 – Monthly Commentary

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One must wonder if the Federal Reserve is deliberately trying to mislead fixed income managers. It certainly seems that way. In 2022, when inflation warning signs were flashing everywhere, the committee maintained their expansionary, zero percent interest rate policy. Their response to the alarming pace of inflation was that it would prove transitory, and that inflation would soon return to the sub-2% trend. The fixed income community, believing the Fed possessed superior knowledge, extended duration to lock in the higher interest rates of the then upwardly sloping yield curve. After months of insisting that that the rise in inflation was transitory, the Committee realized that they had been wrong, and inflation was becoming entrenched in the minds of consumers. Upon that realization, the committee reacted by raising the overnight interest rate 500 basis points over the subsequent 16 months, causing the economy to wobble, and grinding the housing market to a near halt. That sharp move higher in the overnight rate pulled the entire yield curve higher as well, resulting in sharp losses to intermediate fixed income investors.

January 2024 – Monthly Commentary

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With February upon us it may seem odd to revisit the December open market meeting, but the January employment report and the recent 60 Minutes interview of Chairman Powell has us wondering, “what were they thinking?” What we refer to was the dot-plot indicating three rate cuts this year. We’ve never been in favor of the Fed publicly forecasting their expected course of action and this is exactly why. After leaving the overnight rate unchanged for two consecutive meetings, bond investors assumed by their lack of action that they were probably done with the rate hikes. But rate cuts weren’t really on anyone’s radar. Speculation started to creep into the market in November as managers anticipated that we had reached the peak in rates, but the Fed’s communication caused a sharp drop in interest rates across the yield curve. That narrative unleashed a torrent of buying that sent the 5-year note from just a shade under 5% all the way down to 3.8%.

December 2023 – Monthly Commentary

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As the new year kicks off, the bond and stock markets seem to be expecting different outcomes this year. The bond market closed 2023 with a torrid rally that took the yield on the five-year note to 3.8%, down significantly from the mid-October high of nearly 5%. Similarly, stocks, as measured by the S&P 500 closed the year less than 1% away from an all-time high. Seemingly, bond investors view the economy as being on the precipice of, if not already in, a recession; while equity investors seem to be anticipating that profitability is about to reaccelerate. The obvious culprit for the divergence in views is the Federal Reserve’s about-face on interest rates. Prior to the December FOMC meeting, the Fed’s monetary policy had been communicated as “higher for longer” indicating that they were in no hurry to cut interest rates as inflation drifted back to their stated target of 2%.

Halyard’s Weekly Wrap – 12/15/23

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This was a week when investors would have done well ignoring the economic calendar and instead focused on the summary of economic projections, more widely known as the “dot plot.” Released along with the minutes of the open market committee meeting on Wednesday, the dot plot showed a change in thinking from the committee. Investors had been speculating that the Fed had reached the peak of their tightening cycle and the FOMC release confirmed that. The dot plot released in September showed more than half of the committee expected an additional rate hike this year. The December chart indicated that no members anticipate any additional hikes this year. Moreover, the median view is that there will be 75 basis points of rate cuts in 2024. With that decidedly dovish statement, stock and bond markets continued their bullish run. The five-year Treasury note is trading below 4%, closing the week out at 3.92%, while the S&P 500 continues its parabolic rise, rallying more than 15% since the last week of October.

Halyard’s Weekly Wrap – 12/8/23

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This morning’s employment report delivered a curveball to market participants who had been looking for continued economic moderation. That was not to be the case. The economy added 199,000 new jobs in November, up from the previous month and 14,000 more than the consensus had been expected. Average hourly earnings rose 4.0% year-over-year, as it did the prior month. But what really grabbed the investor’s attention was the downtick in the unemployment rate, which came in at 3.7%, 0.2% below the previous month. The large change in household employment, 747,000 new jobs reported, and the change in the size of the workforce, 532,000 new entrants, was responsible for the decline.

Halyard’s Weekly Wrap – 12/1/23

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There were two news stories this week that made us double check the calendar to ensure that we hadn’t transported back sixteen years to pre-crisis 2007. The first had to do with the Federal Housing Finance Agency (FHFA) and the second was the proliferation of private credit.

Halyard’s Weekly Wrap – 11/24/23

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The upward trajectory of stock prices continued this week despite what some observers called hawkish Fed minutes. We’re hesitant to side with that view simply because there was no deviation from the comments that Chairman Powell communicated at the post-meeting press conference. The committee remains vigilante against any signs that economic growth or inflation is reaccelerating and will raise the Fed Funds rate again if needed.