Halyard’s Year End Wrap – 12/31/23

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Halyard’s Year End Wrap – 12/31/23

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.

Happily, the year is going out with a balanced funding picture.  Historically, at quarter-end and year-end, the money markets have experienced sharp moves as financial institutions endeavor to bring their accounts into balance.  This year, signs of such a scramble are few and far between and in instances where they are present, the impact is minimal.

Looking out to the first week of 2024, there’s plenty to drive market volatility.  On Wednesday, the ISM manufacturing surveys are released in the morning with minutes from the December FOMC meeting coming later in the day.  We’ll be especially curious to sift through the minutes to understand how the committee arrived at their rate cut prognosis.  Thursday brings weekly unemployment data and the durable goods report for November.  On Friday, the unemployment report for December is expected to show a slowdown in hiring from last month, coming in at 168,000 new jobs.  At current levels the bond market is not expecting an upside surprise.  Beware!



This commentary is being provided by Halyard Asset Management, L.L.C. and its affiliates (collectively “Halyard” or “we”) for informational and discussion purposes only and does not constitute, and should not be construed as, investment advice, or a recommendation with respect to the securities used, or an offer or solicitation, and is not the basis for any contract to purchase or sell any security, or other instrument, or for Halyard to enter into or arrange any type of transaction as a consequence of any information contained herein.  Although the information herein has been obtained from public and private sources and data that we believe to be reliable, we make no representation as its accuracy or completeness.  The views expressed herein represent the opinions of Halyard Asset Management, LLC, or any of its affiliates, and are not intended as a forecast or guarantee of future results. Past performance is not indicative of future results.

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.

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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.

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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.

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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.

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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.

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Halyard’s Weekly Wrap – 11/17/23

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The October Consumer Price Index, at the headline level, was a welcome panacea for investors’ perception of inflation. Coming in at 3.2% year-over-year, CPI was universally greeted as good news and interest rates plunged across the curve. Looking beyond the headlines at some of the subcomponents raised suspicions that some of the data had been “fudged.” Specifically, the price of health insurance. For many, November is healthcare renewal season and it’s never cheaper to renew than it was the previous year. And certainly not 33.98% cheaper as measured by the BLS report due to a change in calculation methodology. That was one of the subcomponents that stuck out in Tuesday’s report. Nonetheless, the bigger picture is that inflation is falling, and the Fed can take solace in that fact. Moreover, that inflation report pretty much takes a rate hike at the December meeting off of the table as reflected in the Fed Futures market. Futures are now implying no further hikes and a rate cut of 25 basis points by next summer.

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Halyard’s Weekly Wrap – 11/10/23

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In last week’s Weekly Wrap we mentioned, mid-page and in passing, that the Treasury Borrowing Advisory Committee (TBAC) had advised the Treasury to skew borrowing needs away from long maturities to the T-bill sector. Since then, we’ve been discussing whether the TBAC understated their concern. They certainly did as yesterday’s disastrous 30-year bond auction showed. The auction cleared at 4.769%, 5.3 basis points above the 4.716% level at which it was trading at auction time. That represents approximately a 1% fall in price and a meaningful hit to those that bought the bond just minutes before. The bid-to-cover ratio, a measure of demand was 2.236%, the lowest since 2021, foreign demand fell, and the dealer community bought 24.7% of the issue, the largest take down since 2021. In a sense, the large dealer takedown is a blessing for longs. Paradoxically, when the dealers are holding a big position, they tend to defend it by not selling. It’s known in the industry as having strong hands.

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Halyard’s Weekly Wrap – 11/3/23

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We had anticipated a volatile week given the barrage of economic releases and the Open Market Committee meeting but were surprised by the magnitude of the volatility. When we closed out last week the 2-year note, and 30-year bond were both trading above 5% and sentiment was decidedly bearish. The selloff continued into Tuesday with the 30-year touching 5.09%. But reversed on Wednesday with the ADP employment tally coming in at 113,000 newly created jobs, below the 150,000 expected. That started the short covering that dominated the balance of the week. For his part, Chairman Powell’s comments at the post-FOMC press conference were about as dovish as they’ve been since they started the hiking cycle although he didn’t rule out the possibility of one more rate hike. Despite that, the market interpreted his words as no more rate hikes.

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Halyard’s Weekly Wrap – 10/27/23

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As expected, the robust retail sales recorded over the last three months solidly contributed to the outsized Q3 GDP that came in at 4.9%, exceeding the 4.5% consensus expectation. The personal consumption component rose 4.0%, outpacing the 0.8% gain in the previous quarter. Digging into the details, the number isn’t as outrageous as at first glance. Firstly, the government measures the activity versus the previous quarter which, in itself, makes no sense. Every quarter has unique characteristics that impact spending patterns. Vacations in the third quarter, gift giving in the fourth. To adjust for that, the Bureau of Economic Analysis smooths the measure with a seasonal adjustment factor. We prefer, instead, to compare activity on a year-over-year basis and remove the smoothing. On a year-over-year basis, Q3 GDP expanded 2.9%, still an excellent outcome. Another consideration is that government spending represented about 25% of the gain for the quarter. At this stage of the expansion, we’d prefer to see that contribution closer to zero.

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