Halyard’s Weekly Wrap
our thoughts on the past week’s market activity, economic releases, and Federal Reserve commentary
our thoughts on the past week’s market activity, economic releases, and Federal Reserve commentary
3/15/24 – Bracketology vexes US Treasury Market – Yields rise
The bullish tone on which the bond market closed last week has completely reversed and is closing this week with a decidedly bearish resolve. The hope had been that the inflation measures this week would show further progress toward the Fed’s 2% target. That didn’t happen. Instead, the Consumer and Producer price indices both moved higher on a month-over-month basis in February. The core CPI index was 0.4% higher than the January measure, rounding to roughly 5.0%, a far cry from the Fed’s target.
On the other hand, retail sales for February disappointed as the actual month-over-month change came in at 0.6% versus the 0.8% expected and the January outcome was revised 0.3% lower. The lower-than-expected sales were not nearly enough to offset bond selling as investors have become concerned that inflation is reemerging. Exacerbating that concern was Treasury Secretary Yellen’s comments on Wednesday that the inflation trend was favorable, but she doesn’t expect a “smooth path” lower. Reading between the lines, we wonder if that means that we should expect inflation to annualize at 3.8% for the foreseeable future? That’s an important question for several reasons. First, the yield curve is inverted. The yield curve becomes inverted when investors expect that rates will be falling in the future. If inflation becomes imbedded at the current level, interest rates will not be falling anytime soon. Secondly, historically the 10-year treasury note trades about 150 to 200 basis points above inflation, which means that the current 10-year is mispriced. Plugging the 10-year into the Bloomberg price calculator assuming 3.8% inflation indicates, using the historical rule of thumb, that the 10-year is approximately 7.5% too expensive. That’s an enormous overvaluation!
All eyes will be on the outcome of the FOMC next Wednesday. The Fed is not expected to make a change to the overnight rate, but the economic projections of the various members will generate close scrutiny. Those “dot plots” upended the market in December when it showed the expectation of three rate cuts this year and the hint that the first rate cut would be at the March meeting. At the time, the conventional wisdom was that the rate hikes to date were at risk of pushing the economy into a recession and the cuts would be needed to stimulate the economy as it faltered. Through the first 10 weeks of 2024, only pockets of economic weakness have been observed while employment remains strong and inflation stubborn. We suspect that three rate cuts will continue to be the consensus but wouldn’t be surprised to see several of the forecast’s drifting higher. Especially since five members forecast that rates could be cut by more than 75 basis points this year.
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 – 12/15/23
/in Weekly Wrap/by halyardThis was a week when investors would have done well ignoring the economic calendar and instead focused on the summary of economic projections, more widely known as the “dot plot.” Released along with the minutes of the open market committee meeting on Wednesday, the dot plot showed a change in thinking from the committee. Investors had been speculating that the Fed had reached the peak of their tightening cycle and the FOMC release confirmed that. The dot plot released in September showed more than half of the committee expected an additional rate hike this year. The December chart indicated that no members anticipate any additional hikes this year. Moreover, the median view is that there will be 75 basis points of rate cuts in 2024. With that decidedly dovish statement, stock and bond markets continued their bullish run. The five-year Treasury note is trading below 4%, closing the week out at 3.92%, while the S&P 500 continues its parabolic rise, rallying more than 15% since the last week of October.
Halyard’s Weekly Wrap – 12/8/23
/in Weekly Wrap/by halyardThis morning’s employment report delivered a curveball to market participants who had been looking for continued economic moderation. That was not to be the case. The economy added 199,000 new jobs in November, up from the previous month and 14,000 more than the consensus had been expected. Average hourly earnings rose 4.0% year-over-year, as it did the prior month. But what really grabbed the investor’s attention was the downtick in the unemployment rate, which came in at 3.7%, 0.2% below the previous month. The large change in household employment, 747,000 new jobs reported, and the change in the size of the workforce, 532,000 new entrants, was responsible for the decline.
Halyard’s Weekly Wrap – 12/1/23
/in Weekly Wrap/by halyardThere were two news stories this week that made us double check the calendar to ensure that we hadn’t transported back sixteen years to pre-crisis 2007. The first had to do with the Federal Housing Finance Agency (FHFA) and the second was the proliferation of private credit.
Halyard’s Weekly Wrap – 11/24/23
/in Weekly Wrap/by halyardThe upward trajectory of stock prices continued this week despite what some observers called hawkish Fed minutes. We’re hesitant to side with that view simply because there was no deviation from the comments that Chairman Powell communicated at the post-meeting press conference. The committee remains vigilante against any signs that economic growth or inflation is reaccelerating and will raise the Fed Funds rate again if needed.
Halyard’s Weekly Wrap – 11/17/23
/in Weekly Wrap/by halyardThe October Consumer Price Index, at the headline level, was a welcome panacea for investors’ perception of inflation. Coming in at 3.2% year-over-year, CPI was universally greeted as good news and interest rates plunged across the curve. Looking beyond the headlines at some of the subcomponents raised suspicions that some of the data had been “fudged.” Specifically, the price of health insurance. For many, November is healthcare renewal season and it’s never cheaper to renew than it was the previous year. And certainly not 33.98% cheaper as measured by the BLS report due to a change in calculation methodology. That was one of the subcomponents that stuck out in Tuesday’s report. Nonetheless, the bigger picture is that inflation is falling, and the Fed can take solace in that fact. Moreover, that inflation report pretty much takes a rate hike at the December meeting off of the table as reflected in the Fed Futures market. Futures are now implying no further hikes and a rate cut of 25 basis points by next summer.
Halyard’s Weekly Wrap – 11/10/23
/in Weekly Wrap/by halyardIn last week’s Weekly Wrap we mentioned, mid-page and in passing, that the Treasury Borrowing Advisory Committee (TBAC) had advised the Treasury to skew borrowing needs away from long maturities to the T-bill sector. Since then, we’ve been discussing whether the TBAC understated their concern. They certainly did as yesterday’s disastrous 30-year bond auction showed. The auction cleared at 4.769%, 5.3 basis points above the 4.716% level at which it was trading at auction time. That represents approximately a 1% fall in price and a meaningful hit to those that bought the bond just minutes before. The bid-to-cover ratio, a measure of demand was 2.236%, the lowest since 2021, foreign demand fell, and the dealer community bought 24.7% of the issue, the largest take down since 2021. In a sense, the large dealer takedown is a blessing for longs. Paradoxically, when the dealers are holding a big position, they tend to defend it by not selling. It’s known in the industry as having strong hands.