September 2023
The Halyard Reserve Cash Management strategy has generated 4.69% in the last twelve months, after fees and expenses, besting the iMoney fund index of 4.35% for the same period. That compares favorably to the aggregate-indexed strategies, as those portfolios are up only 54bps for the same period and are down more than 3% year-to-date.
The minutes of the September 19-20 FOMC seemed to reflect the committee members’ belief that they’re in the process of achieving the first ever economic “soft-landing.” Comments from the minutes included “Bank credit conditions appeared to tighten somewhat…but credit to businesses and households remained generally accessible,” and “The imbalance between labor supply and demand appeared to be easing.” As expected, the text echoed the answers delivered by Chairman Powell at the post-meeting press conference. There is a chance of one more rate hike this year and that rates will be held at an elevated level for an extended period. In short it read as though the committee was taking a victory lap for their engineering of a soft landing. Bond investors were delighted by the verbiage as witnessed in the collapse of the yield curve. The yield on the 10-year note fell to 4.55% on the day.
Unfortunately, the September data tells an entirely different story. The Bureau of Labor Statistics reported 336,000 jobs were created in September, double the number expected. Moreover, the revision of the prior two months added another 119,000 jobs to the economy. The unemployment rate ticked higher, registering 3.8% for the month, only narrowly above the 3.4% low rate registered last April.
The following week brought the September CPI, another data point that put the Fed’s hopes for a soft landing in jeopardy. Month-over-month and year-over-year headline inflation both ticked higher. The whisper on trading desks was for a surprise to the downside, not up. Year-over-year inflation registered 3.7% in September, a far cry from the 2% target to which the Fed would like to return.
Rounding out the bellwether economic data for September, headline retail sales rose 0.7% above the August tally, and the July month-over-month number was revised to 0.8% from the previously reported 0.6%. The strength was broad-based with all major categories showing impressive growth.
Given the trifecta of “bad for the bond” data, the market has reacted as expected, with the 30-year bond again approaching the 5.0% peak challenged earlier this month and the 2-year note pushing to a new high of 5.23%. With that, speculation has retuned that the FOMC will vote to raise the overnight rate again at their November 1st meeting, although that is barely reflected in the Fed Funds futures market with the current probability of only a 50% chance of one more rate hike.
However, according to Former Fed Governor, Kevin Warsh, that may not be necessary as he wrote in a recent Wall Street Journal opinion article. He points out that while the Fed Funds rate is 0.5% higher since mid-May, the 10-year note yield, which is the benchmark for mortgage rates and corporate borrowing is 1.4% higher, and that is going to cause a significant bite to the economy. We whole-heartedly agree that both are going to slow the economy. Warsh correctly states that the 10-year is the benchmark for housing, but the short-term rate is the benchmark for bank debt, which typically is lower rated and carries a floating rate; to put it plainly, rising short rates are hurting lower-rated credits.
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