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
4/12/24 – Sticky inflation forces rethink on Fed’s December pivot
If you’re thinking there has been a sea change in expectations this week, it’s because there has been. The March Consumer Price Index slammed the door on any hopes of a near-term rate cut with the year-over-year core CPI rising 3.8%. The CPI seems to have settled in at the 3.8% annual rate which is a level that is too high for the Fed to cut interest rates anytime soon. Reflecting that, many of the “Street” economists have withdrawn their forecast for a June rate hike and the possibility of two additional cuts this year and have now taken the safe forecast of one rate cut this year coming at the December meeting. Indeed, the Fed Fund futures have priced in a singular rate cut in the December contract.
That repricing of the overnight rate is having a direct impact on the price of the U.S. dollar as investors and traders are anticipating a widening of the interest rate differential between FX pairs. The cost of one pound Sterling traded below 1.25 for the first time since last November. Similarly, the Euro is closing the week at 1.065, again the cheapest since last November.
In addition to the disappointing inflation report, capital markets are closing the week based on threatening geopolitical news. The price of West Texas intermediate crude oil is the highest it’s been in almost two years, driven higher by fears of a worsening conflict in the Middle East. That will do little to put downward pressure on inflation in next month’s report.
Also making headlines this week was the sharp rally in the price of gold. The commodity, which is widely considered an inflation hedge, has struggled to break above $2,100/ounce. This week it did so with significant follow-through. The precious metal is set to close the week at $2,350/ounce after trading as high as $2,450 earlier today, enjoying the same flight-to-quality that’s driving the price of oil higher. Coincidently, the Wall Street Journal ran a story this week about how Costco began selling one ounce gold bars at retail location last year. While we doubt that the sales are having much effect on the current rally, the news is likely a contributor to the price rise.
Next week the government will release data on retail sales and housing. We’ll be watching to discern if the steady rise in interest rates since the beginning of the year has dented consumers’ ability and propensity to spend.
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 – 12/16/22
/in Weekly Wrap/by halyardAs expected, the Federal Reserve and the European Central Bank both raised overnight interest rates this week, and both delivered a hawkish prepared statement but softened the language in the post-conference press conference. At the press conference Powell said that rate-hike speed is no longer the most important question, now that the top of the Fed Funds target range is 4.5%. We interpret that as meaning that the days of 75-basis point hikes are behind us and that the possibility of a pause at the February meeting is now possible. Christine Lagarde also communicated that another 75-basis point hike is unlikely, but with the ECB overnight rate sitting at 2.5%, she is not likely to garner the same inflation-fighting stature as Powell.
Halyard’s Weekly Wrap – 12/09/22
/in Weekly Wrap/by halyardDecember is a tricky time for the capital markets as banks, brokers, and investors all endeavor to close the year with their respective portfolios 100% invested. Carrying cash over “the turn”, as year-end is colloquially referred to, is not acceptable in the capital markets. As a result, markets can become volatile to the point of seeming irrational. This year that irrationality is most evident in the Treasury Bill market. We refer to the soon to mature December 15th Treasury Bill, although the entire nearby Bill market has also been volatile. The Dec 15 Bill yielded 3.15% at the close of November but ended the day yesterday yielding 2.39%. Logically, that makes no sense. The overnight Fed Funds rate corridor is 3.75% to 4.00%, and the Fed Reserve Repo program offers a set 3.80% rate for the institutions that qualify for the program, and yet the near-term Bill curve continues to be in disarray as we approach the end of the year. One needs to look no farther than the “Calculated New Cash/Pay Down” section of the Treasury Direct website to understand why. Between December 6th and December 13th the Treasury paid down $76 billion in Bills; that’s to say that they sold $76 billion Fewer Bills than the amount maturing. In effect, the Treasury tipped the supply/demand of Treasury Bills out of balance which has resulted in wild gyrations in the Bill market. The Treasury will refill their coffers somewhat next week with net new cash of $64 billion when they sell the new 3-year, 20-year and 30-year securities, but that should not solve the Treasury Bill imbalance. As a result, we expect Treasury Bills to continue to trade rich to the Fed Funds target and the Reverse Repo program into year end.
Halyard’s Weekly Wrap – 12/02/22
/in Weekly Wrap/by halyardThis has been the kind of week that nimble traders love and position traders hate. The two main drivers of volatility this week were Chairman Powell’s speech before the Brookings Institute and the November employment report. The result has been a wildly vacillating rates market. The two-year note started the week at 4.44% but plunged to 4.23% on Thursday before retracing some of the move to close the week at the mid-point of that range. The 30-year followed the same path, opening the week at 3.72% before dipping down to 3.60%.
Halyard’s Weekly Wrap – 11/25/22
/in Weekly Wrap/by halyardThe Federal Reserve released the minutes of their last Open Market Committee meeting at 2:00 p.m. on Wednesday, the afternoon before Thanksgiving. There are a few days on the calendar when liquidity is razor thin and Thanksgiving eve is one of them. The minutes were particularly anticipated as several Fed speakers had recently hinted at reducing the magnitude of the rate hikes going forward. That suspicion was affirmed in the “Participants View” section. The exact quote was “…a substantial majority of participants judged that a slowing in the pace of increase would likely soon be appropriate.” The key words in the quote were “substantial majority.” Remember, committee votes do not need to be unanimous; a simple majority is required, and a substantial majority tells me that they have that. We interpret that statement as the Fed communicating that the December hike will not be 75-basis points, with a 50-basis point hike more likely. The minutes also acknowledged that rate hikes impact the economy with a lag, and they are starting to see evidence of slowing. But any hint of policy action in the New Year was avoided entirely.
Halyard’s Weekly Wrap – 11/18/22
/in Weekly Wrap/by halyardThe Federal Reserve has aggressively raised rates this year beginning in March – with 6 consecutive increases in the overnight target rate. The Fed has gone from 0% to 3.75% in eight months and is expected to increase rates another 50bps to 4.25% at its upcoming FOMC meeting on December 14th. Fed Fund futures markets expect a terminal rate of 5.06% by June 2023 – implying another 75bps are in the pipeline over the next six months.
Halyard’s Weekly Wrap – 11/11/22
/in Weekly Wrap/by halyardFinally, a downward bias to the Consumer Price Index! That’s not to say that prices are contracting. In fact, taking it at face value, the inflation numbers are still too high. But the rate of increase is falling, which is welcome news for consumers. Core CPI, the measure that excludes food and energy, rose 6.3% year-over-year, falling from a year-over-year increase of 6.6% last month. On a month-over-month basis the measure rose 0.3%, down from 0.6% last month. That’s a welcome improvement and comes just in time for the Fed.