Halyard’s Weekly Wrap
our thoughts on the past week’s market activity, economic releases, and Federal Reserve commentary
09/04/26 – The yield to maturity on 2-year US Treasury Notes is 100bps higher since February 28th, – the day the US and Israel escalated the Iran conflict.
The non-farm payroll total for August was a bit of a shocker, with the economy adding 162,000 new jobs versus the expectation for 55,000. That result exceeded even the most optimistic forecast of 125,000 put forth by a private economic forecasting firm.
In addition, the 23,000 lost jobs that were originally reported last month was revised to a gain of 21,000. The unemployment rate remained unchanged at 4.1%, the lowest it’s been in nearly a year.
Economists caution that the August employment report can be tricky due to impact of local educational employment returning and the staggering of the first day of school for regions across the country. Nevertheless, it’s an undeniable bright spot in an economy that has been grinding along despite the negative headlines of the prolonged war with Iran and persistent inflation.
Other economic data released this week showed the economy continues to grow at a moderate pace with the Job Openings report stable, durable goods sales continuing to grow and the initial claims for unemployment insurance holding steady at the low end of the range.
Given Chairman Warsh’s hawkish comments at last week’s Jackson Hole symposium, this morning’s release makes a September rate hike all but a certainty. The consumer price index, to be released next Friday, could offer some relief as the core year-over-year inflation is expected to fall to 2.4% from the 2.5% recorded in the previous month. But we don’t think that outcome is compelling enough to keep the committee from raising the overnight rate.
In anticipation of the hike, the two-year note is closing just below the 4.40% high set on September 1st. On the other hand, the equity market seems to be sanguine to the idea of a 25-basis point rate hike. For the week, the S&P 500 is nearly unchanged and less than 1.5% below the all-time high set last month.
The pre-FOMC communications blackout period starts tomorrow so any discussion of what the committee may do will be unofficial.
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 – 06/17/22
/in Weekly Wrap/by halyardAs we wrote last week, the May inflation report and the University of Michigan consumer sentiment surveys were worrisome indicators. So much so that on Monday the Fed leaked news to the media that they were going to raise rates 75 basis points at the coming meeting, instead of the 50 they’ve signaled since the May meeting. Chairman Powell admitted as much at the post-FOMC press conference. In addition to that hawkish turn, the committee further communicated that they expect the overnight rate to end 2022 at 3.4% and end 2023 at 3.8%. Moreover, to drive home his transformation from Trump lapdog to Volker incarnate, he later said that his commitment to reining in inflation was “unconditional.” Presumably, that means that he doesn’t care how the equity market reacts. We’re not fully convinced of that commitment, but time will tell.
Halyard’s Weekly Wrap – 06/10/22
/in Weekly Wrap/by halyardPresident Biden and the members of the Federal Reserve were hoping against hope that this morning’s CPI report would come in below expectations, but to no avail. In fact, each and every one of the economic releases communicated bad news to our leaders. The headline year-over-year CPI came in at 8.6% versus the consensus estimate of 8.3%, and the ex-food and energy tally came in at 6.0%, a touch above the survey estimate of 5.9%. Later in the morning the University of Michigan consumer survey offered no better news. The overall sentiment tally plunged to 50 versus last month 58, and the inflation component for the coming year ticked up to 5.4%. That’s a clear message to Messrs. Biden and Powell of no confidence. The reaction out of the markets was as expected with Stock indices getting crushed. Several intrepid market analysts said earlier this week that the stock market could be close to a bottom, but they’re eating their words today as the S&P 500 is only 100 points away from its recent low.
Halyard’s Weekly Wrap – 06/03/22
/in Weekly Wrap/by halyardInvestor consensus reversed sharply this week, from the opinion that the Fed would hike twice then pause, to the Fed needs to hike at every meeting until reaching 3.0%. Evidence of the change can be found in the 17 basis point rise in the yield of the two-year note, which is now about 10 basis points below the high of the year.
While the economic data was generally mixed for the week, with the exception of the print on the May employment report, we attribute the consensus change to the meeting between Chairman Powell and President Biden, and comments from the JP Morgan CEO.
Halyard’s Weekly Wrap – 05/26/22
/in Weekly Wrap/by halyardBond prices continued to rebound this week with the front end out performing. The yield to maturity on the 2 year US Treasury Note declined another 10bps to 2.49% while the yield on the 30 year Bond remained the same at 2.99%. The steepening of the yield curve is the result of participant’s expectation of slower growth and lower inflation going forward. The chart below shows that participants removed future expected rate hikes over the course of the next year – effectively recalibrating the terminal fed funds rate lower. The mid-month equity swoon and the string of earnings misses added to the bullish sentiment in the front end.
Halyard’s Weekly Wrap – 05/20/22
/in Weekly Wrap/by halyardThrough April, the capital markets took the Fed’s hawkish tone as a welcome antidote to stubbornly high inflation. But as we move further into the year, that mindset has reversed. Driving the change is the barrage of weak earnings reports we’ve seen over the past two weeks, and specifically retail earnings. Amazon, Walmart and Target were the worst of the category, all having their stock price fall by more than 20%. The overriding culprit has been rising costs of goods sold cutting into their bottom line. That was more than enough to undercut the fledgling return of investors confidence we saw as we closed out last week. For this week the S&P 500 is down more than 4% and trading at its lowest level since March 2021.
Halyard’s Weekly Wrap – 05/06/22
/in Weekly Wrap/by halyardChairman Powel left the first in-person FOMC press conference in two years as a G.O.A.T. (greatest of all time), according to the investment media and suffered the fate of a spring lamb the very next day. For those unfamiliar with the term “spring lamb,” myself included, it’s a lamb slaughtered before it reaches its first birthday. Apologies for the grim analogy. On Wednesday investors were delighted that Powell had driven home the point that a 75 basis point rate hike was not forthcoming and cheered by his general tone of confidence. However, by the next morning the relief had been replaced by anxiety that stagflation is on its way, stock prices are too high and the yield curve too flat. From the Wednesday’s high to the Friday low, the S&P 500 tumbled more than 5.5%. Equally vicious was the selloff in the 30-year. On Thursday, the long bond fell nearly 3 ½ points before retracing about half of that by the close. To put that price action into perspective, the current long bond (2 ¼% 2/2052) is trading at a price less than 82, down from its issue price of 100 in February. The yield-to-maturity calculates to 3.20%, offering a real return of about -5.00%. Moreover, with the latest selloff, the 2-year/30-year yield curve has steepened 51 basis points since April 1st. Typically, the yield curve steepens when market participants believe the Fed is losing the inflation battle.