Halyard’s Weekly Wrap – 09/09/22 – Fed Squashes All Hope of a Nearby Pivot!

With regard to the Fed’s action on overnight rates, our plan was to watch how consumers reacted to the July rate hike as summer progressed.  We expected that high gas prices along with broad based inflation would slow consumer demand enough that the Fed would, at the very least, moderate further rate hikes, possibly even pause for a meeting or two.  Instead, the Fed, via the Wall Street Journal, communicated this week that another 75-basis point hike is likely when it meets on September 21^st.  The various members of the Open Market Committee have all aligned as hawkish and have left open the possibility of another 75-basis point at the November meeting.  That would push the overnight corridor to 3.75% to 4.00% by November 2^nd.    In previous communications the Fed suggested that the target rate was 3.5%, so 4% would be somewhat restrictive.

With talk of moving into restrictive policy, why are we not seeing a slowdown in the jobs market?  The answer can be surmised in this morning’s Canadian jobs report.  Economists had been expecting a 0.1% uptick in unemployment, up from the record low set last month.  Instead, the Canadian economy shed 77,000 jobs and the unemployment rate rose 0.5% to 5.4%.  The Bank of Canada is ahead of the Federal Reserve, hiking their overnight rate by 75 basis points to 3.25% just last week.  This should serve as a cautionary warning that when monetary policy turns restrictive, it can impact the jobs market suddenly.  On the news, the yield on the Canadian 30-year fell 5 basis point to 3.14%, which compares favorably to the 3.45% at which the U.S. benchmark trades.

The first day after the unofficial end of summer was a wild one for new issue corporate debt with nineteen corporations issuing $35 billion.  Investment bankers must have been busy in August warning CFO’s that they should lock in the current interest rates before they move meaningfully higher.  Apparently, the Bankers didn’t give their trading desks a heads up on the issuance, as the 30-year bond rose 15 basis points on the day on positioning for the new debt.

While we don’t expect another banner week of new issuance next week, trading is likely to be volatile with a slew of economic data to be released.  The inflation reports will dictate price action and the forecast is that there will be some mild declines in the year-over-year measures, but economists are narrowly focused on a rise of 8.1%.  Rounding out the week will be Retail Sales on Thursday and the University of Michigan surveys on Friday.  The Michigan 12-month inflation expectations peaked at 5.4% in April before slipping to 4.8% last month.  We wouldn’t be shocked to see that measure tick back up when released next week.