Halyard’s Weekly Wrap
our thoughts on the past week’s market activity, economic releases, and Federal Reserve commentary
9/06/24 –Steeply inverted yield curve causes FOMC indigestion
There was no easing into the post-summer workweek this week. Apparently, the investment bankers had been quite busy over the long weekend because we barely sat down when the new issue deluge began to unfold. On Tuesday alone, there was approximately $43 billion of new corporate supply. We were surprised that with so much paper coming to market, Treasury yields fell on the day. Typically, when bond buyers are fully invested, which is always, they sell Treasury securities to pay for their newly purchased corporate paper. Instead, the yield curve moved sharply lower. Part of the move was anticipation of the Friday employment report, and the expected rate cut coming on September 18th. The corporate new issuance continued through the week with the four-day new issuance totaling approximately $85 billion. The Treasury buying continued as well, with the 30-year bond falling 25 basis points, closing out the week at 3.96%, and the 2-year note closed the week 26 basis points lower at 3.66%
The most anticipated economic data this week was this morning’s employment report, which could be described as a mildly disappointing picture of job growth last month. In August 142,000 new jobs were added, below the 165,000 expectation. But what caught traders’ eyes was the previous month’s revision below 100,000 to 89,000. The report was enough to cause some economists to revise their forecast for the coming rate cut to 50 basis points. That speculation turned into consensus by late morning when Federal Reserve Governor Chris Waller, in a speech at Notre Dame University, explicitly said that the plan is for a larger than expected rate cut. We take that to mean 50 basis points later this month.
Equity investors seem to have interpreted the economic data as foretelling a slow-down in profit, as the S&P 500 fell more than 3% for the week.
Next week we expect that the heightened volatility will continue with the consumer price index released on Wednesday, and the producer price index released on Thursday. The CPI continues to register at an elevated level, but as Chairman Powell communicated at the Jackson Hole summit last month, employment has become the greater concern. With that in mind August inflation measures are unlikely to dissuade the Fed from cutting rates.
While not likely to be market moving, we’re curious to see the results of the University of Michigan survey on inflation expectations for the coming 12 months, to be released Friday. In the previous survey the expectation had fallen to 2.8%. As perception is a driver of actual inflation, we’d like to see that expectation continue to fall.
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.
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Halyard’s Weekly Wrap – 8/2/24
/in Weekly Wrap/by halyardWe had two closely watched events this week, the FOMC rate decision and the monthly employment report, and neither disappointed in terms of market impact. As was widely expected, the FOMC left the overnight interest rate unchanged, with Chairman Powell strongly suggesting that a rate cut would be coming at the September meeting. Throughout his post-meeting press conference, he emphasized the Fed’s dual mandate of full employment and stable inflation. We interpret that as a concern that the employment backdrop has become a worry. The employment measures this week validated that concern.
Halyard’s Weekly Wrap – 7/26/24
/in Weekly Wrap/by halyardThe data this week was decidedly mixed – although the Bond market priced in further cuts. The Philadelphia non-manufacturing index plunged to -19.1 from the 2.9 recorded last month. Similarly, the Richmond Fed manufacturing index dropped to -17 from the -10 recorded last month. As expected, there was no joy to be found in the housing sector as existing and new home sales were both down for the month.
Halyard’s Weekly Wrap – 7/19/24
/in Weekly Wrap/by halyardThere was a host of Fed speakers this week including Chair Powell before the Economic Club of Washington DC. All of them reiterated the Chairman’s testimony before congress last week that they are pleased with the cooling inflation and somewhat concerned about the jobs market. Powell added that “he’s very happy doing the job” of Fed chair and that he’ll stay in office until his term ends in May 2026.
Halyard’s Weekly Wrap – 7/12/24
/in Weekly Wrap/by halyardThe highlight of the week was FOMC Chairman Powell’s dovish testimony on Capitol Hill. In describing the dual mandate of stable jobs and low inflation he said inflation has shown “modest further progress” and that labor markets had cooled “considerably.” We interpret that as meaning that a rate cut has once again been moved to the front burner of the FOMC’s agenda.
Halyard’s Weekly Wrap – 7/5/24
/in Weekly Wrap/by halyardToday caps off a holiday shortened week in the US that saw yields continue to fall across the curve. As we have been writing for quite some time, US economic data has been mixed and this week we saw a decided shift in surprises to the downside. Although, the headline Non-farm payroll number beat softened expectations – registering +206,000 for the month of June compared to the consensus of +190,000. The two-month downward revision subtracted 111,000 previously reported jobs, and private payrolls underwhelmed. The US unemployment rate now stands at 4.1% – up 0.6% from the January 2023 low of 3.4%.
Halyard’s Weekly Wrap – 6/28/24
/in Weekly Wrap/by halyardEarlier this week, the Federal Housing Finance Authority, the government regulator for Fannie Mae and Freddie Mac authorized Freddie to buy second mortgages. The intent of the agency is to make it cheaper for homeowners to tap home equity without refinancing their existing mortgage and thereby preserving the low-rate mortgages originated prior to the run up in rates. The program is an 18-month trial with Freddie authorized to buy up to $2.5 billion second mortgages. The purchases will be limited to second mortgages of $78,277 or less. Critics say that the program will be inflationary, which if it was done on a larger magnitude we would agree with, but with a $2.5 billion program cap, we doubt that will come to pass. On the other hand, it could be a slippery slope to a wider program and another government handout.