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
4/26/24 – Solid US Economic data supports higher interest rates for longer theme
On the back of strong retail sales in the last three months we were expecting that the first pass of Q1 GDP would come in above expectations. When the results were released yesterday, the tally fell well below the 2.5% consensus expectation, showing that annualized growth slowed to 1.6%. Digging through the details yielded a mixed conclusion. Personal spending, the main driver of growth, rose 2.5%, below the 3% consensus expectation, but still supportive of the view that consumers continue to spend.
Subtracting from GDP was the sharp spike in imports. In Q1 imports grew at an annualized pace of 7.2%, the strongest growth since Q3 2022. In the calculation for GDP, imports subtract from growth, meaning GDP would have been higher had the import number been excluded. But it’s also a sign of strong consumer demand.
The final surprise in the GDP report was the personal consumption deflator, ex food and energy. That’s the inflation index that the Fed has touted as their bogey for inflation. The Fed collectively declared victory when the Q4 measure totaled 2.0% but the same measure for Q1 registered 3.7%, clearly in the wrong direction for the committee. That number paired with the stubbornly high inflation rate as measured by the Consumer Price Index will reinforce the belief that the Fed will not be able to cut interest rates anytime soon.
Further illustrating the problem inflation is posing was the University of Michigan inflation expectations for the coming 12 months, which rose to 3.2%, the highest it’s been since last November. Clearly respondents are questioning the concept that inflation has been conquered.
That economic data weighed on bond yields this week, with the 2-year note briefly trading above 5% for the first time since last November, and the 10-year note closing the week just shy of 4.70%, also the highest it’s been since last fall.
Next week is likely to be a volatile one with the conclusion of the FOMC meeting on Wednesday and the April employment report on Friday. The FOMC is widely expected to leave rates unchanged, but traders will be eager to hear how the committee views any changes to the overnight interest rate in the coming months, especially given Q1’s economic strength.
The expectation for non-farm payroll growth is 250,00 jobs added for the month, which would represent another above trend level of job creation. The unemployment rate is expected to remain at 3.8% and average hourly earnings are expected to total 4.0% year-over-year.
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 – 11/12/21
/in Weekly Wrap/by halyardWednesday November 10th provided a proverbial “gut punch” to the capital markets. The day started with the inflation report for October that was way above expectations and was capped with a 30-year bond auction that was an absolute disaster. Year over year CPI came in at 6.2% versus the 5.4% registered last month. Fed Chairman Powell continues to believe that the uptick in inflation is going to pass but it’s not happening, and people are not happy about it. In the latest release, energy had an outsized effect on the result, climbing 4.8% month-over-month, but that represents a little over 7% of the total.
Halyard’s Weekly Wrap – 11/05/21
/in Weekly Wrap/by halyardThis was supposed to be the week that the Fed, the Bank of England and, to a lesser extent, the ECB eased off the accelerator of monetary policy. As communicated for several months now, Chairman Powell announced that the Fed would begin to taper open market purchases in the amount of $15 billion per month. At the post-meeting press conference, which is typically a non-controversial “softball” affair, the tone of the Q&A got a bit confrontational. Powell reiterated repeatedly that the Fed was in no way prepared to raise the Fed Funds rate. After driving home that point, the line of questioning turned to the trading scandal that cost Fed Presidents Kaplan and Rosengren their jobs. We had thought the matter had been put to bed but apparently the media didn’t get the memo. Powell was put through the rhetorical wringer with questions like how he’d restore the confidence of the American people and if he felt the new policy went far enough. He got through those questions with an even tone, but when asked if the trading scandal would hurt his chances for Biden to renominate him and for Congress to approve his approve his nomination, there was decidedly a bit of annoyance in his “I’m not going to answer that question” response. Otherwise, investors were delighted that a rate hike is not contemplated anytime soon, as witnessed by the simultaneous rally in stocks and bonds to close out the week.
Halyard’s Weekly Wrap – 10/29/21
/in Weekly Wrap/by halyardThe dour mood bond buyers have been in since early August reversed itself in a bout of short covering this week, with an especially sharp move on Wednesday. On that day alone, the 10-year Treasury note plunged 9 basis points. The fall in yield occurred despite mostly better than expected economic data, and was highlighted by an outstanding 5-year note auction. Bucking the trend of weaker, tailing auctions, the $61 billion 5-year note cleared 2.5 basis points below the at-auction yield. Moreover, Primary Dealers bought 17.9% of the auctioned amount, the third lowest result since 2004. The momentum was enough to carry the 30-year note below 2.00% for the first time since early September. That’s not to imply that we’ve turned bullish on the bond market. To the contrary, we think the price action this week was simply supply and demand coming back into balance after several bearish months.
Halyard’s Weekly Wrap – 10/22/21
/in Weekly Wrap/by halyardFed Chairman Powell ended the week by delivering a “wishy washy” overview of the economy and monetary policy at a virtual panel discussion. In fairness, he avoided using the word “transitory” to describe the rising prices that have consumers loudly complaining. Instead, he characterized inflation as being elevated and will likely stay that way for a bit longer. He did acknowledge what we learned from the minutes of the last FOMCC meeting that taper will begin soon and conclude next summer.
Halyard’s Weekly Wrap – 10/15/21
/in Weekly Wrap/by halyardThere was much to analyze this week with inflation coming in higher than expected and retail sales surprising to the upside. Equities once again pulled themselves off the mat and appear poised to go at least a few more rounds with greedy and fearful investors. Less obvious but quite telling is the yield curve flattening that took place. The spread between the 2-year note and the 30-year bond has flattened 18 basis points since last Friday. That’s a meaningful move and hints that investors are starting to position for a sooner than advertised interest rate hike.
Halyard’s Weekly Wrap – 10/08/21
/in Weekly Wrap/by halyardAt first glance the September unemployment report released on Friday looked wildly disappointing. It’s been described as “Disastrous” at several media outlets. Consensus was looking for 500,000 newly created jobs for the month, and to be honest, we would have taken the over on that bet. Instead the BLS reported that the economy generated 194,000 jobs for the period.