Halyard’s Weekly Wrap – 08/12/22 – The Summer Doldrums are Upon Us!

The doldrums are finally upon us!  Last Friday’s strong employment report assured worried investors that two straight quarters of economic contraction wouldn’t result in a “hard landing” and this week’s CPI offered hope that the inflation impulse has passed.  With that, investors can relaxed and enjoy the last few weeks of summer.

The 0.00% monthly change in inflation was a welcome reprieve from what we’ve witnessed for nearly two years now.  But we’re hesitant to declare victory in the Fed’s war on inflation.  There’s still an enormous amount of excess liquidity in the system and the Fed’s quantitative tightening has been slow to drain the excess.  The Fed’s reverse repo operation, the de facto add-on to the Treasury Bill market, totaled $2.199 trillion at Thursday’s operation, just a few billion below the peak reached earlier this year.  And the T-Bill market itself continues to flash warning signs, with yield levels well below the overnight rate and bid/ask spreads of as much as 11 basis points, in some cases.  Raising interest rates will slow some interest sensitive sectors, such as home and automobile sales, but the Fed needs to drain liquidity and they’ve barely scratched the surface.

We were encouraged with the downtick in the University of Michigan 1-year inflation expectation from 5.2% to 5.0% but consider that expectation to still be too high.  Consumer sentiment is that inflation will continue to be a problem for the foreseeable future which, historically, is a leading indicator of future inflation.

As a result of the recent better than expected economic data, the Fed Fund futures market is indicating only about a 50% chance of a 75-basis point hike in September, and that Fed Funds will peak to 3.6% in first quarter of next year.  Enjoy the final days of summer because we expect that volatility will return with a vengeance this fall.

This commentary is being provided by Halyard Asset Management, L.L.C. and its affiliates (collectively “Halyard” or “we”) for informational and discussion purposes only and does not constitute, and should not be construed as, investment advice, or a recommendation with respect to the securities used, or an offer or solicitation, and is not the basis for any contract to purchase or sell any security, or other instrument, or for Halyard to enter into or arrange any type of transaction as a consequence of any information contained herein.  Although the information herein has been obtained from public and private sources and data that we believe to be reliable, we make no representation as its accuracy or completeness.  The views expressed herein represent the opinions of Halyard Asset Management, LLC, or any of its affiliates, and are not intended as a forecast or guarantee of future results. Past performance is not indicative of future results.