Halyard’s Weekly Wrap – 6/17/22
Government Policy Run Amuck
As we wrote last week, the May inflation report and the University of Michigan consumer sentiment surveys were worrisome indicators. So much so that on Monday the Fed leaked news to the media that they were going to raise rates 75 basis points at the coming meeting, instead of the 50 they’ve signaled since the May meeting. Chairman Powell admitted as much at the post-FOMC press conference. In addition to that hawkish turn, the committee further communicated that they expect the overnight rate to end 2022 at 3.4% and end 2023 at 3.8%. Moreover, to drive home his transformation from Trump lapdog to Volker incarnate, he later said that his commitment to reining in inflation was “unconditional.” Presumably, that means that he doesn’t care how the equity market reacts. We’re not fully convinced of that commitment, but time will tell.
Likely to complicate that pledge is the very visible slowdown in the economy. On Wednesday, while all eyes were on the Fed, the BLS reported that housing starts plunged 14.4% in May from the month prior. Sure, there’s probably some weather-related noise and there may be some scope for revision, but the underlying factor is that mortgage rates are about double where they were at the end of last year. A $400,000 mortgage financed at 6% costs $712 a month more than the same amount financed at 3%. That’s 42% more in monthly payments!
Investors are weighing both the hawkish Fed and the apparent slowdown and seem to have decided that they don’t like either. The two-year note traded wildly for the week, carving out a range of 3.09% to 3.43%, before finally settling today near the weekly low. To put that into perspective, it closed out May at 2.55%.
Stocks didn’t fare any better, with the S&P 500 continuing last week’s swoon, bringing the year-to-date performance to about -22%.
Our focus next week will be on Existing Home Sales on Tuesday and New Home Sales on Friday. Hopefully, given the lack of tier 1 economic data, the markets can stabilize.
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