Halyard’s Weekly Wrap – 10/7/22 – “The Song Remains the Same”

Higher rates for longer was the concise message out of the Federal Reserve this week. After an attempt at rallying on Monday, both stock and bond prices rose with quarterly rebalancing and short covering, markets again succumbed to the Fed’s message by the week’s end.  The S&P 500 finished up 5.5% higher by Tuesday evening and the yield to maturity on the 2 year US Treasury Note finished lower by 17bps to close October 4th at 4.09%.  The rallies were driven in part by the 3rd shot at a narrative that encompasses a central bank on the cusp of slowing the pace of rate hikes.

Not so fast, as all the Fed members are on the same page and advertised the same resolute message:  higher rates and higher rates for longer to squash inflation.  By close of business Friday, the S&P was still positive for the week, although Friday’s swoon totaled more than 3% – and the 2 year Note was back to its quarter end high 4.3%.

The catalyst was many, but US Non-farm payroll data released Friday morning will get the most attention. Payroll employment figures came in slightly above expectations and the labor force contracted a touch. The result was an unemployment rate of 3.5% for the month, an improvement from the 3.7% reported for August. Although employment gains have slowed from the blistering pace of 2021 and early 2022 – a +263k payroll number is still way above trend growth. Thus, we conclude that despite the tightening of financial conditions since the beginning of 2022, employment remains firm.

Of Note, a lesser watched statistic – Job openings, contracted again for the 5th time in 6 months. Job openings are now lower by 1.8 million jobs since March. To put that in perspective, the Job openings figure fell by 2.2 million jobs during the two months between February and April of 2020.

For Bond investors, this year has been the worst drawdown in the broad fixed income market on record. Through September 30th, the Aggregate index is down 15%.

The tell for us will be next week, as we get inflation and retail sales data as well as the first of the 3rd quarter earnings releases. Has the financial tightening been enough, or will the Fed need to us two feet on the brakes?

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