Halyard’s Weekly Wrap – 01/07/22
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. The minutes failed to detail a targeted amount, but it’s certainly well below the current balance of $8.2 trillion. They did indicate that a “substantial buffer” is the likely target. Also, some participants favor a complete runoff of the Fed’s mortgage-backed holdings in favor of Treasury debt.
The tone of the minutes changed so dramatically that we see it as an “our bad” admission that the members had completely misread economic indicators for the last year. So much so that had the Fed not committed to a disciplined communication policy, they would probably raise rates at the meeting later this month. But that would be too drastic a move and has not been communicated at all. So we’ll look to March 16th for the first rate hike of this cycle.
That’s not to say that bond investors have not been paying attention. The price of the 30-year bond is down over ten points since this time last month, trading an astonishing 46 basis points higher in yield. However, the damage hasn’t been limited to the long end. The two-year note is roughly 35 basis points higher for the same period, closing the week at 0.87%. From our perspective this is unmitigated good news, as we’re able to invest at higher and higher yield levels..
Looking to next week, we’ll be watching the CPI and PPI reports for signs that inflation may be abating somewhat. If not, the Fed is going to continue to come under criticism for misreading the rising prices of the last year.
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