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
5/03/24 – Slower than expected job growth lifts bond prices
Investors began this week with much trepidation, given the mixed economic data and stubbornly high inflation that has characterized the first four months of this year. It was widely expected that Powell would offer a “mea culpa” for suggesting that rate cuts were imminent back in December. He didn’t go quite that far but did opine that the committee was “less confident” that inflation would fall to 2% in the near term. But he also cast doubt on the possibility that the next move in interest rates would be a hike.
Given the wide dispersion in economic data this week, the committee’s decision to keep the overnight rate unchanged and refrain from speculating on the next move was a wise one. The Conference Board’s consumer confidence index plunged, falling from 110.9 in January to 97.0 in April. Also, surprising sharply to the downside, the JOLTS job openings measure plunged to 8.48 million vacancies, well off the 12 million open and unfilled jobs registered just 13 months ago. Continuing with the weaker than expected data, the employment report for April showed that 175,000 new jobs were added for the month, below the expectation of 240,000 and the unemployment rate ticked up to 3.9%. Arguably, however, that’s not a bad outcome for the economy. Employment has been growing above trend for several months and that is not good for sustainability. That torrid growth likely contributed to the 4.7% jump in unit labor costs in the first quarter.
Based on the totality of data this week, the economy appears to be coming in for a soft landing. That possibility seems to have emboldened speculators to again price-in an overnight rate cut of 25 basis points later this year. Similarly, the 2-year note is closing the week at 4.81%, 19 basis points lower than last Friday’s close.
Accompanying the FOMC statement was the notice that the Fed intends to reduce the roll-off of their investment portfolio. Currently they allow $60 billion a month of their portfolio to mature without being reinvested. That monthly reinvestment of maturing issues will be reduced to $25 billion per month. As the portfolio has declined from approximately $9 trillion to the current $6.7 trillion, they seem to have concluded that they can slow the pace. We note that the change is a net easing of monetary policy as it means less of new issue Treasury’s needs to be absorbed by investors.
After the barrage of economic data this week, investors will be given a reprieve as very little data will be forthcoming next week.
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 – 4/7/23
/in Weekly Wrap/by halyardInterest rates continued to trend lower this week led by the intermediate sector as early economic data supported a Fed pause.
The following economic data releases supported the view that the US was nearing a recessionary environment:
• Manufacturing and Service Surveys(ISM) both came in weaker than expected and softer than the previous month
• Job openings fell to 9.9 million from a revised 10.5 million for the month of February
• Factory orders and Durable goods posted weaker readings
Halyard’s Weekly Wrap – 3/31/23
/in Weekly Wrap/by halyardThe flight to quality abated from the panic of mid-March, but there is a tremendous amount of money that has gone to cash. The Fed’s overnight reverse repo (managers lend to Fed, the Fed pays interest) attracted its 3rd highest total since inception – $2.4 trillion. Money Market Fund assets swelled to a record of $5 trillion. The dash for cash resulted in outsized moves higher in price for bonds and notes in the Front end. For example, the one month bill (4/11/23 maturity) was trading at 4.58% on March 9th – just before SVB meltdown. The same Bill (4/11s) traded as low as 3.55% on March 27th , and is now closing today at 4.77% as the worst fears of continued bank contagion have subsided.
Halyard’s Weekly Wrap – 3/24/23
/in Weekly Wrap/by halyardWe thought that the Federal Reserve would have held the overnight rate steady at the conclusion of this week’s FOMC meeting, but we were wrong! The Fed raised the overnight rate by 25 basis-points, taking the range to 4.75% to 5.00%, the ninth consecutive rate hike. In his press conference, Powell essentially said that the banking sector is fine and that markets should expect another rate increase.
Halyard’s Weekly Wrap – 3/17/23
/in Weekly Wrap/by halyardAnyone with children under 12 years-old understands the concept of the participation trophy (or has at least watched the Bluey Episode titled “Pass the Parcel”). In an effort to make sure that all participants feel good about themselves, everyone gets a trophy. For the younger kids, quite often the parents discourage keeping score or even declaring a winner. This week felt like it was trophy day for the banking system. The first trophy went to Silicon Valley bank for their mismanagement of their hold-to-maturity book, by establishing a duration that suffered a significant loss of value from the Fed’s draconian rate hikes to date. The FDIC, which guarantees deposits up to $250,000, on Sunday evening announced that the guarantee would be extend to all depositors regardless of the size of their deposit. As has been communicated, many of the deposits were the working capital of promising, albeit not yet profitable, start-ups. Start-ups that should their break-through prove successful, hold the winning lottery ticket to hundreds of millions or billions of dollars.
Halyard’s Weekly Wrap – 3/10/23
/in Weekly Wrap/by halyardFriday can be best summed up in the words of Ron Burgundy – “Boy, that escalated quickly… I mean, that really got out of hand fast.”
With Chairman Powell’s testimony before Congress coming just two days before the belated release of the February employment, we expected volatility in the capital markets to spike, but not to the extent that it did on Friday morning. The market panicked when news broke that Silicon Valley Bank (SVB) was experiencing a mass exit of depositors and it’s plan to raise capital through a secondary equity sale had failed. While the bank is on the smallish side, investors panicked and sold bank stocks in a classic “sell the rumor” fashion. Despite the FDIC’s takeover of SVB. The XLF bank ETF fell more than 8% this week, and we wouldn’t be surprised if it took a week or two for financial stock prices to bounce back.
Halyard’s Weekly Wrap – 3/3/23
/in Weekly Wrap/by halyardIt was fleeting, but for a few hours on Thursday the 30-year bond traded above 4.0% as bond investors debated whether the Fed has again fallen behind in battling inflation. The bout of selling reversed itself on Friday, with the long bond closing out the week unchanged. Fed Fund futures, on the other hand, continue their upward march and are now forecasting a peak rate of 5.45% in September of this year.