Halyard’s Weekly Wrap – 1/19/24 – Bond market re-centers its expectations over its skis
At the close of trading last Friday, the street thinking was that the Fed would cut rates at the March meeting and that there would be at least three additional rate cuts this year. By Tuesday, that conclusion was being reassessed and the selling has been relentless. The 5-year Treasury is closing the week at 4.06%, up nearly 30 basis points from last Friday’s close. The initial catalyst for the move was Federal Reserve Governor Chris Waller’s comments on Tuesday morning that suggested that the Fed would be careful and deliberate in cutting rates this year which contradicted the opinion that the cuts would come soon and at every other meeting.
Economic data released this week supports the view that growth continues at a healthy pace. Retail Sales for December rose solidly in the month and were revised higher for November, boosting the GDP forecast for the fourth quarter north of 2%. Housing starts faded marginally from the surprisingly strong November, but building permits ticked higher. An indication that the dip in mortgage rates is driving speculation that home buying will soon return.
The true outlier this week was the University of Michigan survey results. Current conditions ticked 10 points higher, rising to 83.3 and the 12-month inflation expectation fell to 2.9%. It was the first time the inflation expectations came in below 3% since December 2020. The language accompanying the release portrayed the economy as booming. Specifically, “sentiment has climbed a cumulative 29%, the largest two-month increase since 1991.” It seems that the consumer has bought-in to the notion that the Fed has successfully engineered an economic soft-landing.
Despite the abundance of positive news this week, Fed Fund futures are still priced for the overnight rate to be 125 basis points lower one year from now. However, the probability of a March 2024 rate cut is significantly lower. Economic data next week will likely further convince the FOMC that a preemptive rate cut is not warranted. GDP, new home sales, and personal spending are all expected to indicate that the economy is doing just fine.
enters its expectations over its skis
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.
