Halyard’s Weekly Wrap
our thoughts on the past week’s market activity, economic releases, and Federal Reserve commentary
01/09/26 – Revising the rate cut plan?
While the first week of the new year was an eventful one given the controversial action in Venezuela and Minnesota, the capital markets were fairly quiet. Official government economic data is finally catching up, with a decidedly mixed tone. The Institute of Supply Management (ISM) manufacturing surveys continue to come in below the 50 while services are all above that level. In all, we interpret them as indication that the economy continues to grow, but at a subdued pace.
The employment report for December released this morning was no exception. Consensus was anticipating a gain of 70,000, above the 50,000 new jobs that were created. That was not enough of a miss to upset the market given that the overall number of employed people grew while the labor force contracted resulting in a decline of the unemployment rate to 4.4%. By the end of the day, economists were revising their rate cut plan from near term to June at the earliest.
In soft market news President Trump on Thursday directed Fannie and Freddie, the mortgage agencies, to buy $200 Billion in secondary mortgages in an effort to drive down mortgage rates. The market responded accordingly with the spread between Mortgage and Treasury rates narrowing by 10 basis points. We think that’s probably the extent of the move but wouldn’t be shocked if it were to drift 5 or 10 basis points tighter. Despite the tightening, we don’t expect that to have a meaningful impact on mortgage rates which remain at the high end of the recent range.
On balance the bond market seemed happy with the news this week with the 2-year/30-year yield curve narrowing eleven basis points and the S&P 500 touched a new all-time high.
Next week we will continue to get a mix of fresh and stale economic data. December CPI is expected to register 2.7%, unchanged from the previous month on Tuesday. The Producer Price Index and Retail Sales, both to be released on Wednesday, are November measures so the market is likely to look past those results.
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 – 3/11/22
/in Weekly Wrap/by halyardThe bond market continues to suffer from the consistent selling pressure that commenced last fall. The rate rise has not been limited to the government bond market. Municipal bonds, Investment grade corporate notes and high yield bonds have all suffered losses. The price of the $35 billion Blackrock I-shares investment grade bond ETF (LQD), the vehicle many investment advisors utilize for their fixed income exposure, is down -9.25% year-to-date. Similarly, PIMCO’s MINT is down -0.79% and Blackrock’s NEAR is down -0.65% year-to-date. As with LQD, both are frequently used by investment managers as an alternative to holding cash.
Halyard’s Weekly Wrap – 03/04/22
/in Weekly Wrap/by halyardThe heighted volatility we saw last week intensified this week as bid/ask spreads widened and liquidity has begun to dry up. Volatility was elevated across the board with crude oil continuing to sky-rocket, developed foreign exchange showing marked weakness versus the U.S. dollar and equity volatility, as measured by the VIX index, closing the week at the high end of the recent range. Of course, the panicky market is a result of Russia’s declaration of war against the Ukraine. While the general population is aware of the market dislocations, the rise in the price of gasoline is a direct hit to their wallet and one that has the average citizen worried. As we close out the week, economic forecasters are attempting to back into the price of a gallon of gasoline should the global economy halt the import of Russian oil, and their forecasts are frightening. Estimates are as high as $150 to $200 per barrel of oil with gasoline topping out at $8 to $10 per gallon. Should the precious commodity rise to that level, we’re fairly confident that the U.S. economy will be in a recession. As it is, the Atlanta Federal Reserve’s GDP calculator is forecasting 0.041% economic growth in Q1 2022. We wonder how the investing public is going to react to 0% economic growth after enjoying 6 quarters of “eye-popping” economic growth fueled by emergency COVID stimulus. The first estimate of that growth comes at the end of April so we have plenty to worry about between now and then.
Halyard’s Weekly Wrap – 02/25/22
/in Weekly Wrap/by halyardSo…What a quiet week in the capital markets! As of now, bond yields have drifted higher and the yield curve flatter as investors contemplate the Fed’s upcoming rate hikes. Since last Friday the 2 year US Treasury Note yield has risen 14 basis points to round out the week at 1.61%, while the yield to maturity on the 10 year US Treasury Note rose 6bps to close Friday out at 1.99%. Stocks, as measured by the S&P500, rose for the week – closing around 60bps higher. Let’s digest that for a minute. Wait, Russia invaded the Ukraine on Thursday. Putin made his motive clear – demilitarize the Ukraine. The shock that move sent through the capital markets found the S&P down nearly 3% that day making its peak to trough (from Jan 4th high) down 14%. Safe haven assets rose – gold, and US Treasury Bond prices in particular. The money market space removed much of the probability of a 50bps move higher in fed funds. World leaders responded with sanctions and the Ukraine is fighting back. Apparently, that was enough for risk assets to rebound and put Putin’s actions in the review mirror. The S&P500 is up more than 6% from the low print this week.
Halyard’s Weekly Wrap – 02/18/22
/in Weekly Wrap/by halyardThe front end of the interest rate markets have priced in between 0.75% and 1.00% of tightening over the past several months. The one year US Treasury Bill has risen to 1.0% from 20bps in early December. The Two year US Treasury Note similarly has increased to 1.48% from around 50bps in December. The Two year note briefly traded above 1.60% at the end of last week as St. Louis Fed President Bullard began pounding the table for more immediate policy changes than the market had been expecting based on Powell’s measured and deliberate pace. Yields have fallen a touch since then – being walked lower by Ukraine – Russia geopolitical risks and the release of the FOMC January meeting’s minutes, which showed an inclination to move faster but no hint of an imminent 50 bps increase.
Halyard’s Weekly Wrap – 02/11/22
/in Weekly Wrap/by halyardThe biggest surprise this week wasn’t the shocking 7.5% rise in the Consumer Price Index over the last 12 months; although that was certainly an unpleasant surprise. Instead, the surprise is how quiet the markets are finishing the week. On the back of the outsized CPI, traders began to “whisper” that the Fed would preemptively raise rates Friday morning at 8:00 a.m. Validating that speculation, St. Louis Fed President Bullard was quoted as saying that he supported a 50 basis point rate hike in March and would like to see the Fed Funds rate 100 basis points higher by June. One would expect that prior to making such a bold forecast he would have had a conversation with the Chairman so as to not send a misleading message to the markets. With that in mind the markets took his message seriously, with the two-year note 20 basis points higher and the S&P 500 nearly 90 points lower on the day. We arrived at our desks prepared for a day of carnage on Friday morning, only to find a the Fed said that the Central Bank doesn’t favor a half point hike or an emergency move. Apparently, Bullard didn’t have the blessing of the Chairman to make such a statement?
Halyard’s Weekly Wrap – 02/04/22
/in Weekly Wrap/by halyardThe January employment report did little to quell the frazzled nerves of investors. Following the ADP employment number, which showed a contraction of -301,000 on Wednesday, the street was prepared for a negative non-farm payroll print this morning. Especially given that Labor Secretary Marty Walsh and White House Press Secretary Jen Psaki delivered warnings that the report may be a bad one due to the spike in virus cases. In fact, the BLS said the economy added 467,000 new jobs for the month, a number greater than any of the 23 economic forecasters surveyed by Bloomberg. Anyone who watches economic data long enough knows that the devil is always in the detail, and this report was no different. Apparently, looking through to the seasonal adjustment employed to “smooth” the series, the actual number would have been much closer to trend. Moreover, the BLS did their 10-year lookback adjustment in January, which further muddied the final number.