Halyard’s Weekly Wrap – 06/24/22

As if the investing environment couldn’t be more challenging, this week only served to further muddy the water.  Fed Chairman Powell testified before Congress in what was once referred to as the Humphrey-Hawkins testimony.  The testimony is mandated twice a year and the Chairman is tasked with justifying his dual mandate of keeping unemployment and inflation low. His testimony was mostly comments Congressmen don’t want to hear.  Namely, acknowledging that rising interest rates poses the risk of a recession, and that the employment market is running “too hot.”  In the perverse thinking of bond investors that was good news.  The logic goes that If the Fed Chairman is thinking that the coming rate hikes could result in a recession, then that means that inflation will be coming down faster than they had hoped and, therefore, rates will need to be cut sooner than anticipated.  Taking their cue from bond investors, the stock jockeys interpreted that logic as a signal to buy, hence the 6% rise in the S&P 500 off the low touched last week.  Notably, Powell didn’t say anything at the testimony that would indicate that the committee has changed their mind about raising rates another 75 basis points at the end of July.

It has been a data lite week, but the few secondary economic reports were somewhat eyebrow raising.  The weekly mortgage application tally rose for the second consecutive week, bucking our opinion that home buyers were balking at buying homes with mortgage rates topping out near 6%.  On that basis we were surprised to see mortgage applications jump 4.2% over the previous week.  Of course, as always, the devil is in the details, and in this case the details revealed a big jump in adjustable-rate mortgages.  The number of adjustables jumped 36% over the previous week.  We have to hand it to the clever mortgage brokers for enabling potential home buyers to realize their American dream.  The worry is that adjustable mortgages were one of the culprits behind the financial panic of 2008.  That’s not to say that we’ll be seeing “no doc” mortgages anytime soon, but the jump has put adjustable mortgages on our radar, especially since new home sales took an unexpected jump higher in May.

Next week, in addition to looking forward to the Fourth of July holiday, we’ll be getting revised data on first quarter GDP.  With the data nearly two months old, it’s not likely to be market moving news.  But remember, a recession is defined by two consecutive quarters of GDP contraction and this quarter feels as though growth is slowing.  The day after GDP, we’ll get a glimpse of Personal spending in May.  That’ll give us a clue as how consumers are reacting to higher prices for seemly everything.