Halyard’s Weekly Wrap
our thoughts on the past week’s market activity, economic releases, and Federal Reserve commentary
05/15/26 – Equity prices fade as market focuses on higher interest rates
We get the sense that the market was looking for some tangible outcome from the meeting between President’s Trump and Xi and disappointment in the lack thereof rippled through the markets today. The 2-year note had been under upward pressure all week but finally broke materially higher this morning. The 2-year is closing the week at 4.07%, the highest level since last summer.
The equity market finally took note of the rising yield curve as the S&P 500 retreated from the all-time high touched yesterday, falling as much as 1.3% intraday today. The index has mounted a ferocious rally, rising nearly 19% since hitting its year-to-date low of 6,316 at the end of March.
Economic data released this week was not supportive of another cut in Fed Funds. The headline consumer and producer price indices were both above expectations, and while they are being pushed higher by rising energy costs, the concern is that inflation is at risk of broadening into the wider economy. Similarly retail sales for April registered better-than-expected with the control group rising 0.5% MOM and the previous month revised 0.1% higher to 0.8% in a sign that consumers continue to spend despite the rising cost of gasoline. With gas above $4.50 a gallon nationally we’ll be watching to see if that spending holds up.
Next week will see the release of housing data for April and we don’t expect it to be good news. The forecast is for a -5.1% drop in housing starts for the month. With the average mortgage rate climbing to 6.5%, what is normally a robust spring housing market is looking more like a bust.
On Monday Kervin Warsh starts his first day as Fed Chairman. Reviewing the Fed speech calendar, he is first scheduled to speak to the public at the conclusion of the June 17th FOMC meeting. We wish him much luck navigating this challenging economy!
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 – 12/09/22
/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.
Halyard’s Weekly Wrap – 11/04/22
/in Weekly Wrap/by halyardThe Fed’s well publicized “leak” hinting that the Central Bank would raise the Fed Funds rate by 75 basis points this week, but that another hike of equal magnitude in December meeting was not a certainty proved at least partially correct. The committee did raise rates by 75 basis points and, with it, offered a new sentence to the statement: “In determining the pace of future increases in the target range, the committee will take into account the cumulative tightening of monetary policy…” It was a written acknowledgment that the committee realizes that they have already tightening aggressively and, importantly, policy change works with a lag. However, Chairman Powell’s tone 30 minutes later, at the post-meeting press conference, was decidedly hawkish. We weren’t the only managers to be fooled by the head fake. Bond traders immediately took rates higher. May 2023 Fed Fund futures had rallied to 4.805% on the day of the “leak,” but have since reversed and are closing out the week at 5.12%. Similarly, the 2-year note which traded down to recent low of 4.30% reversed violently and are closing out the week at roughly 4.71%, the high for the year.