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
4/26/24 – Solid US Economic data supports higher interest rates for longer theme
On the back of strong retail sales in the last three months we were expecting that the first pass of Q1 GDP would come in above expectations. When the results were released yesterday, the tally fell well below the 2.5% consensus expectation, showing that annualized growth slowed to 1.6%. Digging through the details yielded a mixed conclusion. Personal spending, the main driver of growth, rose 2.5%, below the 3% consensus expectation, but still supportive of the view that consumers continue to spend.
Subtracting from GDP was the sharp spike in imports. In Q1 imports grew at an annualized pace of 7.2%, the strongest growth since Q3 2022. In the calculation for GDP, imports subtract from growth, meaning GDP would have been higher had the import number been excluded. But it’s also a sign of strong consumer demand.
The final surprise in the GDP report was the personal consumption deflator, ex food and energy. That’s the inflation index that the Fed has touted as their bogey for inflation. The Fed collectively declared victory when the Q4 measure totaled 2.0% but the same measure for Q1 registered 3.7%, clearly in the wrong direction for the committee. That number paired with the stubbornly high inflation rate as measured by the Consumer Price Index will reinforce the belief that the Fed will not be able to cut interest rates anytime soon.
Further illustrating the problem inflation is posing was the University of Michigan inflation expectations for the coming 12 months, which rose to 3.2%, the highest it’s been since last November. Clearly respondents are questioning the concept that inflation has been conquered.
That economic data weighed on bond yields this week, with the 2-year note briefly trading above 5% for the first time since last November, and the 10-year note closing the week just shy of 4.70%, also the highest it’s been since last fall.
Next week is likely to be a volatile one with the conclusion of the FOMC meeting on Wednesday and the April employment report on Friday. The FOMC is widely expected to leave rates unchanged, but traders will be eager to hear how the committee views any changes to the overnight interest rate in the coming months, especially given Q1’s economic strength.
The expectation for non-farm payroll growth is 250,00 jobs added for the month, which would represent another above trend level of job creation. The unemployment rate is expected to remain at 3.8% and average hourly earnings are expected to total 4.0% year-over-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 – 02/24/23
/in Weekly Wrap/by halyardThis holiday shortened week was free from the wild, unexpected economic data we’ve been seeing since the start of the year. Activity continues to surprise to the upside as has the inflation backdrop. Existing home sales fell -0.7% from last month’s measure, while the second look at Q4 GDP was revised lower to 2.7% from 2.9%. The most eye-popping of the week’s data, the Personal Consumption Expenditure price deflator, the Fed’s preferred measure of inflation, rose 5.4% year-over-year. That measure, when paired with the above expectation CPI released mid-month has taken the steam out of the nascent bond rally that started the year.
Halyard’s Weekly Wrap – 2/17/23
/in Weekly Wrap/by halyardThis week’s economic data was far worse than we had feared! We had hoped that 400 basis points of rate hikes would have slowed the economy and eased the rate of inflation, but to no avail. The January consumer price index, month-over-month, registered 0.5%, and 6.4% on a year-over-year basis, outpacing consensus expectations.
Halyard’s Weekly Wrap – 2/10/23
/in Weekly Wrap/by halyardAs we wrote last week, the tone of Chairman Powell’s comments during the post-FOMC press conference left observers with the sense that the Fed was close to a peak in the overnight rate. That view was immediately undone on Friday when the BLS reported that 517,000 jobs were added to the economy in January. Certainly not the outcome expected of an economy teetering on the brink of recession. To counter Powell’s comments, Fed speakers this week resounded their hawkishness. The “jawboning” worked with the 2-year note rising 40 basis points from last week’s low yield. The 30-year yield also rose, but by about half of the 2-year move. The overnight/30-year spread remains inverted and is closing the week at about -80 basis points. As we’ve mentioned before, an inverted yield curve has a negative cost of carry for levered investors. The risk is that those investors tire of the expense and exit the trade causing long rates to rise. Effectively, it’s the inverse of a short squeeze. That realization may have played a role in the disastrous 30-year auction on Thursday. Treasury notes and bonds trade on a when-issued basis for a number of days prior to being auctioned. The practice is useful in that it gives investors a strong idea of the yield level at which the new issue will clear. Yesterday’s 30-year auction had a 3.2 basis point tail. That was a disastrous outcome and equated to about a half point repricing on the bonds bought just before auction.
Halyard’s Weekly Wrap – 02/03/23
/in Weekly Wrap/by halyardWe thought the lead story for this week was going to be the less hawkish, post-FOMC press conference, but in fact it’s the January employment report. Economists had been forecasting that the economy would add 188,000 jobs in January and the unemployment rate would tick up to 3.6%. Given the increasing number of layoff announcements since December, we thought the actual release would have been about half of the expectation. Instead, the economy generated a staggering 517,000 new jobs during the month and the unemployment rate ticked down to 3.4%. There was no weakness in any of the subcomponents and, to be honest, the report was bewildering.
Halyard’s Weekly Wrap – 01/27/23
/in Weekly Wrap/by halyardFourth quarter GDP registered 2.9% annualized growth, beating the 2.6% expectation, but as is often the case with economic data, the devil is in the details. The growth was driven by rising inventories, government spending, and softening imports. The weakness in imports is mostly due to the Chinese covid quarantine and the resultant slowdown in production. With the Chinese factories humming again, we expect that net imports will revert to being a drain on GDP in the first quarter. Similarly, inventories added nicely to the headline number but that is also likely to flatten this winter. The biggest disappointment in the release was private final domestic demand. The measure of how much Americans wanted to consume fell from 1.1% in Q3 to 0.3% in Q4. That’s a significant slippage in demand, which jibes with the disappointing retail sales registered in the last two months of 2022.
Halyard’s Weekly Wrap – 01/20/23
/in Weekly Wrap/by halyardThough it was a holiday shortened week in the U.S., there was plenty of action in the markets. The most significant market-moving news was the Retail Sales report for December. Recall that November retail sales were disappointing, worrying analysts that the holiday selling season was going to be a bust. That worry proved prescient! Retail sales for November were revised down from -0.6% to -1.0% from the October level. On Wednesday the government reported that December retail sales fell -1.1% from the revised November figure. Parsing through the details, the weakness was broad-based, with sales at department stores falling a shocking 6.6% from November’s level.