Halyard’s Weekly Wrap – 05/06/22

Chairman Powel left the first in-person FOMC press conference in two years as a G.O.A.T. (greatest of all time), according to the investment media and suffered the fate of a spring lamb the very next day.  For those unfamiliar with the term “spring lamb,” myself included, it’s a lamb slaughtered before it reaches its first birthday.  Apologies for the grim analogy.  On Wednesday investors were delighted that Powell had driven home the point that a 75 basis point rate hike was not forthcoming and cheered by his general tone of confidence.  However, by the next morning the relief had been replaced by anxiety that stagflation is on its way, stock prices are too high and the yield curve too flat.  From the Wednesday’s high to the Friday low, the S&P 500 tumbled more than 5.5%.  Equally vicious was the selloff in the 30-year.  On Thursday, the long bond fell nearly 3 ½ points before retracing about half of that by the close.  To put that price action into perspective, the current long bond (2 ¼% 2/2052) is trading at a price less than 82, down from its issue price of 100 in February.  The yield-to-maturity calculates to 3.20%, offering a real return of about -5.00%.  Moreover, with the latest selloff, the 2-year/30-year yield curve has steepened 51 basis points since April 1^st.  Typically, the yield curve steepens when market participants believe the Fed is losing the inflation battle.

Despite the rate hike and the impending quantitative tightening, the front-end of the Treasury market is still flashing signs of a policy out of whack.  Following Wednesday’s hike, the Fed funds target is 0.75% to 1.00%, but 5/31/22 T-bills are offered at 0.35%, and the Fed’s reverse repo book continues to total more than $1.8 trillion.  Both are symptoms that excessive liquidity continues to remain in the system.

Given that information and the price action in stocks and bonds we were stunned by a paper released today by the Minneapolis Federal Reserve President Neel Kashkari, entitled “Policy has tightened a lot.  Is it enough?”  Kashkari is without a doubt the most dovish of the members of the Fed, but after reading his paper we’d take it a step further can say that he’s also the most out of touch.  We highlight several of his points as follow:

“Because the FOMC has strong credibility with market participants, they take our forward guidance seriously, as they should.”

“Just before the pandemic hit, the 10-year real rate was about 0 percent, and today it has returned to about 0 percent…”

“I believe monetary policy was roughly at a neutral stance shortly before the pandemic.  Long-term real rates have now returned to roughly that level.”

Happily, Kashkari is not currently a voting member of the FOMC, but he is part of the committee and sits through the briefing with all of the other members.  Evidently, he has not been paying attention.

Finally, today’s employment report came in above expectations, with the U.S. generating 428,000 new jobs in April, besting the consensus expectation of 380,000.  The unemployment rate ticked up 0.1% to 3.6%, but that is simply a nuance between the household and establishment measure.  Looking through the various sub-categories we can’t find anything that suggests the robust jobs market will cool anytime soon.

Next week we will get fresh information about current inflation as well as University of Michigan survey of consumer sentiment, which we find a particularly useful current indicator.