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 – 9/22/23
/in Weekly Wrap/by halyardThe FOMC left the Fed Funds lending rate unchanged, as was widely expected, and hinted there could be one more rate hike later this year. According to their interest rate graphic, the DOT plot, the committee anticipates another 0.25% rate hike later this year followed by a 0.50% rate cut in 2024. However next year’s expectation is the median forecast with committee members’ expectations running from 4.5% to 5.75%. The individual forecasts for 2025 are even more dispersed, ranging from 3.0% to 5.75%. In short, “higher for longer!” At the post-meeting press conference Chairman Powell was upbeat on the current state of the economy which leads us to conclude that he has become one of the more hawkish committee members.
Halyard’s Weekly Wrap – 9/15/23
/in Weekly Wrap/by halyardWe wrote last week that the release of the consumer and producer price indices, retail sales and the Michigan surveys would be a litmus test for the Fed’s rate decision later this month. Unfortunately, the releases had a little something for everyone and didn’t offer definitive visibility on the outcome of next week’s FOMC meeting.
As expected, consumer prices rose in August, rising more than consensus expectation. The year-over-year measure of CPI registered 3.7%, up from 3.2% last month, but the core CPI for the same period fell from 4.7% to 4.3%. That’s far from the Fed’s 2% target but the anecdotal slowing in the economy is likely enough to keep the Fed on the sidelines at the September 20th FOMC meeting, but not enough call the current monetary policy the peak
Halyard’s Weekly Wrap – 9/8/23
/in Weekly Wrap/by halyardToday we’ll look to the coming week, instead at the conclusion of the weekly wrap. The release of the consumer and producer price indices, retail sales and the Michigan surveys will be a litmus test for the Fed’s rate decision later this month. Comments from committee members seem to indicate that they will hold rates steady, but CPI and retail sales could prove problematic to that view. Recall that last month retail sales spiked, and many attributed the uptick to the Amazon prime-day sales. As such economists are looking for a month-over-month change of 0.1%. Anecdotally though, contemporaneous measures indicated that retailing continued to hum which could result in an above expectation result. More of a concern though is CPI. In June, the year-over-year measure plunged from 4.0% to 3.0%, giving the Fed some comfort that policy was moving in the right direction. Then the measure ticked up to 3.2% in July. Not a happy outcome but tolerable given that core inflation remained subdued. A similar outcome is expected next week, only economists are forecasting the YOY measure to tick up to an indefensible 3.6%. Rising energy costs will be the culprit but that’s not going to matter to consumers. The fact remains, the cost of filling the gas tank continues to hit our wallets.
Halyard’s Weekly Wrap – 9/1/23
/in Weekly Wrap/by halyardDespite the muted volatility of the last unofficial week of summer, economic data released this week will likely keep the Fed on the sidelines later this month. The data was heavily focused on the labor market and the releases show a slowing in hiring. The Job openings measure (JOLTS) has plunged in the last wo months, falling from 9.6 million available and unfilled jobs to 8.8 million and well below the 12 million unfilled jobs touched last spring. Simultaneous with the JOLTS release, the conference board consumer confidence index fell from 114.0 to 106.1 as the uptick in confidence witnessed last month vanished.
Halyard’s Weekly Wrap – 8/25/23
/in Weekly Wrap/by halyardFormer St. Louis Bank fed president James Bullard attempted to steal the thunder from the Fed’s feel good summer meeting in Jackson Hole with his Thursday missive of accelerating growth and the need for the Fed to continue with rate increases. We asked Mr. Bullard to point to the 5 most recent economic indicators that are accelerating – He didn’t respond to Halyard’s questions.
Following last week’s retail sales beat, the only indicators to surprise to the upside were new home sales and jobless claims. Halyard would describe the economic data as “fair to middling”.
Existing home sales, which are 5x more than new home sales, fell again and are 7.2% lower year to date. Durable goods and PMI surveys both underwhelmed.
Halyard’s Weekly Wrap – 8/18/23
/in Weekly Wrap/by halyardRetail Sales for July rose 1.0% over the previous month, much higher than the 0.4% that was expected, although pundits attributed the upside surprise to the Amazon Prime day which was hosted mid-month. The worry is that those sales pulled forward future sales and there will be a giveback in August and September. Looking back on the Prime Day effect on monthly retail sales shows no pattern of an uptick in the month of the sale and no pattern of a drop off in sales in the following month so we caution against assuming retail sales will drop in September and/or August.