Halyard’s Weekly Wrap – 05/20/22

Through April, the capital markets took the Fed’s hawkish tone as a welcome antidote to stubbornly high inflation.  But as we move further into the year, that mindset has reversed.  Driving the change is the barrage of weak earnings reports we’ve seen over the past two weeks, and specifically retail earnings.  Amazon, Walmart and Target were the worst of the category, all having their stock price fall by more than 20%.  The overriding culprit has been rising costs of goods sold cutting into their bottom line.  That was more than enough to undercut the fledgling return of investors confidence we saw as we closed out last week.  For this week the S&P 500 is down more than 4% and trading at its lowest level since March 2021.

The bond market has reacted to equity weakness by pushing the entire yield curve, save for the “odd-ball” 20-year bond, below 3%.  Concern can also be found in the Fed Fund futures curve which is now forecasting that the overnight rate will top out at about 3%, down from nearly 3.5% earlier this year.  Consensus seems to be developing that the Fed will hike rate by 50 basis points at the June and July meeting leaving the overnight rate a 2% as we start the month of August.  Presuming they don’t do anything in August, in that there is no Open Market Committee meeting scheduled, that would give them two months of economic data upon which to evaluate the state of the economy and any retracement of inflation.

In reaction to the sell-off in equities, investors have begun to wonder at what level they can look for the Powell “put” to kick in.  The “put” is the level of panic in the equity market at which the Fed reverses course and eases policy.  It originated with Chairman Greenspan and his reaction to the October 19, 1987 stock market crash, and has been a fixture of monetary policy with every successive Fed Chair.  So far, the members of the Committee have mostly kept their mouths quiet with regard to the equity market.

The economic data coming next week are mostly second tier and not likely market moving, and with the vast majority of Q1 earnings having been reported, hopefully equity investors can calm their frazzled nerves.