Halyard’s Weekly Wrap – 04/22/22

The invisible hand versus the Fed Chairman wearing the big wooden clogs.  That could best describe the comparison of the Volker Fed versus the Powell Fed.  Ironically, Chairman Powell, along with uber-dove,  ECB Chair Christine Lagarde, spoke at a panel discussion hosted by the Volker Alliance on Thursday.  The recently turned hawkish Powell confirmed that the Fed was prepared to raise the overnight Fed Funds rate by 50 basis points…when it meets nearly two weeks from today.  Moreover, he strongly suggested that the committee is likely to raise the overnight rate by another 50 basis point when they meet on June 15th.  Earlier that day Fed President Mary Daly said the Fed doesn’t “want to go so abruptly that we surprise Americans.”  Does she really believe that Americans aren’t aware that the Fed has been talking about tightening policy for over six months?  Fed Funds futures have priced in four 50 basis point hikes between now and September, which begs the question, why is the Fed dragging their feet in normalizing interest rates?  Our guess is the committee has enjoyed having its cake and eating it too with the stock market, but that may be coming to an end given the price action of the S&P 500 over the last two days.

Countering Powell’s hawkish tone, Lagarde said that the ECB will need to wait for data to dictate what the central bank will do with policy.  As a reminder, the ECB overnight borrowing rate is still negative at -0.50%, despite year-over-year inflation of 7.5%.  Granted, Europe has the Russian aggression to consider, but we would think she’d want to immediately bring the overnight rate above zero to lend some support to the beleaguered Euro.

First quarter earnings continued to trickle in this week with financials, happily, devoid of any surprises despite the sharp rise in interest rates since the first of the year.  Procter & Gamble and Kimberly Clark both surprised to the upside as they were able to adjust selling prices higher to offset the rising cost of material.  Not that we’re accusing the consumer goods manufacturers of price gouging, but isn’t that what they’re doing?

Looking to next week, the economic data will be mostly secondary, with the exception of the advance look at Q1 GDP.  The consensus is for aggregate activity to decelerate from 6.9% in the fourth quarter to 1% in the first.  We don’t think that’s likely to stall the march to higher rates, but it may change the conversation.  We’ll be listening closely for the first utterance of the word “stagflation.”

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