Halyard’s Weekly Wrap – 10/15/21

There was much to analyze this week with inflation coming in higher than expected and retail sales surprising to the upside. Equities once again pulled themselves off the mat and appear poised to go at least a few more rounds with greedy and fearful investors. Less obvious but quite telling is the yield curve flattening that took place. The spread between the 2-year note and the 30-year bond has flattened 18 basis points since last Friday. That’s a meaningful move and hints that investors are starting to position for a sooner than advertised interest rate hike. Indeed, one of our favorite Fed Funds indicators, Euro Dollar futures, has experienced a big move this month and now is indicating that Fed Funds will be 37 basis points higher by the end of next year. Similarly, 2-year notes have cheapened significantly and are trading just shy of 0.40%. That’s much more attractive than the 0.15% offered just a few months ago. But if Fed Funds are going to be at that level next fall, the 2-year will need to rise higher still to compensate investors for holding it.

The minutes of the September FOMC meeting were released this week and buried on the ninth page of the document were suggested details of tapering open market buying. The taper amount put forth was $10 Billion a month of Treasury securities and $5 Billion a month of agency mortgage-backed paper. At that pace, open market purchases would end late next summer. The minutes did not offer a commencement date for the taper but it’s like to begin before the end of the year. We’d prefer that they begin in November simply because we’re of the mind that it should have commenced months ago.

Of no market significance, but likely longer term consequence, is the Fed’s Randall Quarles term as banking regulator ended this past Wednesday. We believe this material because Quarles was the first person to serve in that role since it was created from the Dodd-Frank act in 2010. Criticism has been leveled at him as he has softened some bank regulation over the years. Until a new head is named the FOMC will evaluate regulatory issues on a consensus basis. To bring the obvious to the fore, we have a vacant regulatory chief spot, Powell twisting in the wind, and Senator Elizabeth Warren eager to have a say in what happens to both. Stay tuned!

Finally, retirees will get 5.9% bump in their monthly social security checks. The largest increase in 39 years. That’s not transitory Mr. Powell! That’s a permanent increase in the cost of the commitment to the program.