Halyard’s Weekly Wrap – 08/19/22 – Economic Data Aplenty!

Economic data released on Monday showed weakness in manufacturing in the New York region and continued slowdown in national housing activity as seen in the national association of home builders index, housing starts and building permit data.  This led to short covering of trades betting on higher interest rates.   The short covering was temporary as industrial production and core retail sales surprised slightly to the upside.   Economists were looking for signs that the slowdown in housing and high and persistent inflation was weighing on spending.  Stripping out auto sales and gasoline, retail sales posted a decent month.   The headline, which includes autos and gas sales was flat month over month.  CPI for July was also flat month over month, which indicates, that the consumer is buying less gasoline and motor vehicles while spending more on other goods and services.  There was also a sharp uptick in non—store retail sales (online shopping).   The take away is that high inflation has caused some demand destruction in certain categories but overall, the consume held up.

The FOMC released its minutes from the July 27th meeting on Wednesday.  The minutes showed that the FOMC is committed to higher front end rates but is aware of the lag that policy adjustments have effecting economic data.  Suggesting that 75bps rates hikes are behind us and that we can expect smaller or more normal rates hikes going forward.

Bond yields finished the week higher.  The yield to maturity on the 2 year Note rose  +3bps to a 3.27% while the increases in yields were sharp out the curve.   Yields rose by 15bps on 5 and 10 year Notes to  close the week out at 3.11% and 2.98% respectively.

Municipal Bond yields convulsed this week as US Treasury yields moved higher.  The tax free space had seen approximately three months of respite from the march higher in yields – which left tax free paper rich relative to taxable bonds.  The yield to maturity on 5 year AAA tax free paper rose 35bps since last week and the ratio of municipal to US Treasuries rose from 61% to near 70% at the close of the week.

Next week the Kansas City Fed hosts the annual Jackson Hole meeting so Chairmen Powell will be on the tape on August 25th.  Next week is also packed with economic data.  We will get Service and Manufacturing PMI data, durable goods, new home sales, and the first revision to the 2nd quarter GDP figures.   A busy week for the last days of summer!

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