Halyard’s Weekly Wrap
our thoughts on the past week’s market activity, economic releases, and Federal Reserve commentary
03/13/26 – Bond yields materially higher as market fixates on energy’s inflationary impact. This higher for longer scenario will depend on the length of the US / Iranian conflict.
The war with Iran is concluding its second week and hopes for a speedy conclusion have diminished and with it a return to normalcy for the markets. Interest rates have skyrocketed, with the two-year note closing the week 35 basis points higher from the first of the month. For the first time in nearly four years the spread between the 3-month Treasury Bill and the 2-year Treasury note is positive. That’s a telling signal that traders think that the Fed is done cutting rates. The reasoning is that with crude oil trading at an elevated level, gas prices are going to filter into inflation and that the Fed is not going to cut rates with inflation rising. That’s especially true if energy begins to filter through into the broader economy. The flaw in that thinking is that if the energy becomes sustainably expensive, the already faltering economy will likely tip into recession and the Fed will be forced to cut rates.
Economic data this week continues to send a mixed signal on growth and inflation. Month-over-month CPI ticked up to 0.3% from 0.2% in January, while the year-over-year measure was unchanged at 2.5%. Unfortunately, the Fed’s preferred inflation gauge, the core PCE price index rose 0.4% from the previous month and registered 3.1% year-over-year. That’s doesn’t give the Open Market committee justification to cut rates further.
Housing starts unexpectedly rose, but that outcome was tempered by a -5.4% drop in building permits, meaning the spike is going to be exactly that and not a sustained rise in home building. Also of note, the recent rise in Treasury rates has pushed the 30-year mortgage rate above the 6% level – quashing the recent refinance activity.
Also released this morning was the second look at Q4 GDP for 2025, which showed that growth was half of what was first reported, coming in at annualized rate of 0.7%. Personal consumption was also lower, from 2.5% to 2.0%. It appears that the Government shutdown did more economic harm than first estimated.
Next Wednesday is the conclusion of the March Open Market Committee meeting. The broad consensus is that they will leave the overnight rate unchanged. We expect that Chairman Powell will be peppered with questions about the price of oil, and we expect him to be even more evasive than usual. In passing, this will be Powell’s penultimate meeting as Chairman. He deserves credit for riding out the wrath of Trump and maintaining the Committee’s independence.
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.
Contact Us
Location
399 Knollwood Road
Suite 107B
White Plains, NY 10603
Halyard’s Weekly Wrap – 04/29/22
/in Weekly Wrap/by halyardLast week we flagged the advance report of Q1 GDP as the economic report to watch this week, and we were spot on. Investors were shocked to learn that economic activity contracted 1.5% in the first quarter, driven primarily by trade and government spending. On the bright side, the consumer continued to spend, with the personal consumption measure rising 4.7% over Q1 2021. But a big expansion in imports and reduced government handouts were more than enough to offset the gain in consumption.
Halyard’s Weekly Wrap – 04/22/22
/in Weekly Wrap/by halyardThe invisible hand versus the Fed Chairman wearing the big wooden clogs. That could best describe the comparison of the Volker Fed versus the Powell Fed. Ironically, Chairman Powell, along with uber-dove, ECB Chair Christine Lagarde, spoke at a panel discussion hosted by the Volker Alliance on Thursday. The recently turned hawkish Powell confirmed that the Fed was prepared to raise the overnight Fed Funds rate by 50 basis points…when it meets nearly two weeks from today. Moreover, he strongly suggested that the committee is likely to raise the overnight rate by another 50 basis point when they meet on June 15th.
Halyard’s Weekly Wrap – 04/07/22
/in Weekly Wrap/by halyardThe minutes of the recently concluded FOMC meeting are rarely of interest since the Fed adopted the post-meeting press conference during Chairman Bernanke’s term. Since then, Fed Chair’s have chosen to communicate the committee’s thinking at the post-meeting press conference. Chairman Powell didn’t follow that pattern at the March 15 meeting as the minutes contained “bombshell” information. Two days ago Fed Governor Brainard rocked the markets with her comments that the Fed was ready to begin to reduce its balance sheet. That was confirmed yesterday when the minutes loosely detailed how balance sheet reduction was to be implemented.
Halyard’s Weekly Wrap – 04/01/22
/in Weekly Wrap/by halyardThe brutal bear market in bonds continued this week, with the two-year note 108 basis points higher than where it stood on March 1st. Following a solid non-farm payroll report, two’s are 9 basis points higher for the first day of April. As a result, the 2-year/30-year yield curve is now marginally inverted, which is likely to provoke recession fears. Historically an inverted yield curve signals a recession ahead. We think the selling is getting overdone, but are reluctant to extend duration until we see some stability in the market.
Halyard’s Weekly Wrap – 3/25/22
/in Weekly Wrap/by halyardThe vicious bear market in bonds that began last fall continued this week with the 2-year Treasury note touching 2.33% this afternoon. Recall that the 2-year note closed last week just below 2.00%. Fed speakers were again the driver of the selloff, strongly suggesting a 50 basis point hike at the May 4th FOMC meeting and potentially another 50 basis point at the June 15th meeting. Citibank is forecasting four 50 basis point hikes this year, while Goldman Sachs is expecting that the 2-year note will end the year at 2.90%. Those forecasts and retail liquidation of their fixed income holdings is behind the relentless selling. Ironically, equity investors seem to be unfazed by the sharp selloff in fixed income. Since hitting the low for the year in late February, the S&P 500 index has rallied nearly 10%.
Halyard’s Weekly Wrap – 3/18/22
/in Weekly Wrap/by halyardAll eyes were on the FOMC outcome this week. As expected, Powell and the FOMC raised short term interest rates 25bps to a range of 25ps to 50bps. Market participants interpreted the accompanying statement and Powell’s post meeting comments as decidedly hawkish. This flattened the US Treasury curve further, with an inversion seen in 3 year US Treasury Notes and 5 year Notes exceeding the yield to maturity of the 10 Year Note. A signal usually portending slower growth in the future as interest rate increases slow sectors of the economy most dependent upon leverage.