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
4/19/24 – Was Powell Born a Ramblin’ Man?
The red-hot economic data continued this week with the release of March Retail Sales. The report showed that retail sales rose 1.1% over the previous month, more than double what was expected. February retail sales were revised to a 0.6% monthly gain from the 0.3% that was first reported. The gains were broad based and have some economists thinking that the Q1 GDP forecast may be too low. The estimate last Friday was for 2.1% growth, but the consensus thinking as of this morning is 2.5%.
The one sector where consumers were not spending last month was housing. Housing has been in a slump since the Fed began raising interest rates, causing affordability of home ownership to slip away from most first-time home buyers. The trend had shown signs of bottoming at the end of last year as the forecast for lower interest rates piqued buyer interest. But that reversed in March as it became apparent that interest rates will remain stubbornly high. Current 30-year mortgage rates have again topped 7% which has been a level of deterrence to home buyers.
The various Fed speakers this week reinforced the view that we won’t see three rate cuts this year and traders reacted negatively when New York Fed President John Williams mentioned another rate hike, which he assured listeners was not his base case. Even that mention leads us to believe it’s in the back of his mind and may be discussed at the next FOMC meeting.
As an aside, we read through the Federal Reserve’s beige book on Wednesday and were befuddled by its conclusions. The beige book qualitatively aggregates economic conditions across the 12 Federal Reserve districts by surveying a diverse population. The conclusion was “ten out of twelve districts experienced slight to modest growth,” and “consumer spending barely increased at all.” Indeed, looking through the summaries of each of the districts, the conclusion did not jibe with what we’re seeing in the “hard” data. We’ve concluded that it’s a misperception of what survey participants believe is happening in the economy versus what is actually happening.
Next week, in addition to the first look at Q1 GDP, the government will release data on durable goods and home sales, with the University of Michigan surveys rounding out the week. The last survey of 12-month forward inflation ticked up 0.2% to 3.1%, an unwelcome sign of consumer psychology on where prices are heading.
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 – 1/5/24
/in Weekly Wrap/by halyardThe first week of the new year had been a quiet one until the employment report was released this morning. The headline non-farm payrolls surprised to the upside, with 216,000 new jobs added to the workforce, and the unemployment rate falling to 3.7%. At first glance the report was a solid one and the bond market immediately sold off. However, digging into the details revealed that it was not as robust as the headline suggested. Glaringly, household employment fell 683,000; the biggest drop since April 2020 when COVID crushed employment for much of the workforce. It’s not unusual for the non-farm and the household reports to deviate, but an 899,000 deviation leads us to conclude that one or the other will be significantly revised. Later this morning, the Institute for Supply Management (ISM) reported a sharp drop in their services employment survey. Again, the drop was the sharpest since April 2020. Investors seem to have interpreted the combined reports as offering a solid backdrop for the Fed’s plan to cut rates this year.
Halyard’s Year End Wrap – 12/31/23
/in Weekly Wrap/by halyardIt’s been a remarkable year in the capital markets! Last December, year-over-year consumer price inflation was running 6.5% and the Federal Reserve was solidly in “higher for longer” mode with the committee prepared to continue to raise rates to quell inflation. The ten-year Treasury opened 2023 yielding 4.48%, ticked up to a high of 4.65% early in the year, before ultimately settling at 3.88%. The Fed communication has changed dramatically in the last 12 months. They dropped the higher for longer mantra this month, instead communicating that they anticipate three rate cuts in the coming year. Let’s hope they’re not premature in their abrupt policy change. By several measures, the economy continues to run hot, especially employment. It has become clear that there’s a worker shortage in the United States. The unemployment rate in November was 3.7%, just above the all-time low. The Fed usually doesn’t cut rates when unemployment is near a cycle low. But this Fed has proved that they have no interest in any rules-based policy.
Halyard’s Weekly Wrap – 12/22/23
/in Weekly Wrap/by halyardThe Euphoria from last week’s news that the Fed was done raising interest rates and expects to cut rates by 75 basis points next year continued into this week. In anticipation of those cuts, the entire yield curve has priced approximately 100 basis points lower. The knock-on effects can be found almost everywhere; the S&P 500 is less than 1.0% off an all-time high, mortgage rates are back below 7.0%, and consumer confidence as measured by the Conference Board’s present situation index is skyrocketing. But we wonder if that euphoria is unwarranted. After all, the move lower in rates is an easing of financial conditions, coming while year-over-year core CPI is 4% and pressure for higher wages is unrelenting.
Halyard’s Weekly Wrap – 12/15/23
/in Weekly Wrap/by halyardThis was a week when investors would have done well ignoring the economic calendar and instead focused on the summary of economic projections, more widely known as the “dot plot.” Released along with the minutes of the open market committee meeting on Wednesday, the dot plot showed a change in thinking from the committee. Investors had been speculating that the Fed had reached the peak of their tightening cycle and the FOMC release confirmed that. The dot plot released in September showed more than half of the committee expected an additional rate hike this year. The December chart indicated that no members anticipate any additional hikes this year. Moreover, the median view is that there will be 75 basis points of rate cuts in 2024. With that decidedly dovish statement, stock and bond markets continued their bullish run. The five-year Treasury note is trading below 4%, closing the week out at 3.92%, while the S&P 500 continues its parabolic rise, rallying more than 15% since the last week of October.
Halyard’s Weekly Wrap – 12/8/23
/in Weekly Wrap/by halyardThis morning’s employment report delivered a curveball to market participants who had been looking for continued economic moderation. That was not to be the case. The economy added 199,000 new jobs in November, up from the previous month and 14,000 more than the consensus had been expected. Average hourly earnings rose 4.0% year-over-year, as it did the prior month. But what really grabbed the investor’s attention was the downtick in the unemployment rate, which came in at 3.7%, 0.2% below the previous month. The large change in household employment, 747,000 new jobs reported, and the change in the size of the workforce, 532,000 new entrants, was responsible for the decline.
Halyard’s Weekly Wrap – 12/1/23
/in Weekly Wrap/by halyardThere were two news stories this week that made us double check the calendar to ensure that we hadn’t transported back sixteen years to pre-crisis 2007. The first had to do with the Federal Housing Finance Agency (FHFA) and the second was the proliferation of private credit.