Halyard’s Weekly Wrap – 06/03/22

It’s the Beginning of Hurricane Season

Investor consensus reversed sharply this week, from the opinion that the Fed would hike twice then pause, to the Fed needs to hike at every meeting until reaching 3.0%.  Evidence of the change can be found in the 17 basis point rise in the yield of the two-year note, which is now about 10 basis points below the high of the year.

While the economic data was generally mixed for the week, with the exception of the print on the May employment report, we attribute the consensus change to the meeting between Chairman Powell and President Biden, and comments from the JP Morgan CEO.

The media seized upon the Biden/Powell meeting but it’s unclear what the takeaway was.  Both are taking heat for stoking the inflationary flames, so the optics of the meeting can be spun as favorable, especially for Biden.  But honestly, we struggle to see how.  Did Biden browbeat Powell into tightening monetary policy at a faster pace to stifle inflation, which would risk tipping the economy into recession.  That wouldn’t help with the President’s sinking approval rating.  Conversely, it’s conceivable that he tried to convince him to ease off of the rate hikes to keep the economy growing.  Again, not helpful with the approval rating.  Truth be told, our take is that the meeting was nothing more than a “camera op” to allow the President to say that he is focused on the problem.

The day following the meeting, JP Morgan’s Jamie Dimon said that his forecast for “storm clouds” ahead had been upgraded to an economic “hurricane.”  Not to be outdone by Dimon, the CEO’s of Goldman Sachs and Citibank echoed their concerns that putting the inflation genie back in the bottle is going to be problematic, and not likely to be beneficial to the economy.  Investors took that to mean that the nearly 15% YTD loss on the S&P 500 may not be the bottom.

Finally, the jobs report for May printed 390,000 new jobs in the month, well exceeding the 318,000 expectation.  Moreover, last month’s contraction in the labor force was reversed by 330,000 new entrants; an undoubtedly positive statement about the health of the jobs market.  Clearly, there are sectors of the economy that have slowed from the two rate hikes this year, namely housing and some areas of consumer consumption.  But the broad economy continues to chug along.  At least for now.  We’re curious to see if it’s still the case in August when the overnight rate is 100 basis points higher.