Halyard’s Weekly Wrap
our thoughts on the past week’s market activity, economic releases, and Federal Reserve commentary
09/25/26 –
The price action in the bond market this week has been nothing short of shocking. The two-year Treasury note is yielding 4.87%, 15 basis points higher than last Friday’s close and 56 basis points higher than where it was trading on the first of the month. Similarly, the 30-year bond is yielding 5.49%, 19 basis points higher on the week and 30 basis points higher since September 1st.
The catalyst was the release of the S&P purchasing manager surveys on Tuesday. The service and manufacturing surveys were much higher than expected and the composite survey came in at 58.4, the highest level in 5 years.
Further contributing to the bearish sentiment was the parade of FOMC members speaking publicly, with their warnings about inflation, and commenting that the overnight rate will need to be raised multiple times. Following last week’s rate rise, the conventional wisdom seemed to
have settled that the Fed would raise the overnight rate one more time and then be done. Fed fund futures are now indicating that the overnight rate will be approximately 100 basis points higher by next June.
Behind the scenes the bearish sentiment carried over into the 5-year, and 7-year note auctions. On Wednesday the $70 billion 5-year note auction was met with tepid demand. The auction cleared at 5.033%, a yield that was 3.10 basis points above where it was trading at auction time. That yield differential, or “tail” in bond parlance, was the second highest on record.
What’s remarkable is that the debacle that transpired in bonds had little impact across the broader capital markets. The S&P 500 continues to trade just below its record high, the dollar is modestly higher, and gold is modestly lower. That the equity market didn’t react to the spike in rates is especially surprising. The spike is likely to impact growth, which in turn is likely to impact profits.
Next week will bring a close to the third quarter and the BLS will make a quick turnaround and release the September jobs report on October 2nd. The expectation is that there will be little give back to the surprisingly strong August report, and that 100,000 jobs were added in September. The unemployment rate is expected to remain at 4.1%.
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 – 10/6/23
/in Weekly Wrap/by halyardWay back in July we wrote that the BLS non-farm payroll report told a far different story than the private ADP employment report, with the former quadrupling the latter. That situation has risen again, only in reverse. The ADP report showed tepid job growth of 89,000 in September while the BLS reported 336,000 for the period, double the number expected. Moreover, the revision of the prior two months added another 119,000 jobs to the economy. While excellent news for the economy it’s likely to put another Fed rate hike back into play at the November 1st meeting. That may not be necessary as Former Fed Governor Kevin Warsh wrote in a Wall Street Journal opinion article this week. He points out that while the Fed Funds rate is 0.5% higher since mid-May, the 10-year note yield, which is the benchmark for mortgage rates and corporate borrowing is 1.4% higher, and that is going to cause a significant bite to the economy. We whole-heartedly agree that both are going to slow the economy. Warsh correctly states that the 10-year is the benchmark for housing, but the short-term rate is the benchmark for bank debt, which typically is lower rated and carries a floating rate; to put it plainly, rising short rates are hurting lower-rated credits.
Halyard’s Weekly Wrap – 9/29/23
/in Weekly Wrap/by halyardBonds were under intense selling pressure for most of this week in what could only be described as a delayed reaction to the “higher for longer” message delivered by Chairman Powell last week. The old 2-year note (August 2025 maturity) traded as high as 5.19% before closing the week at 5.11%. The 2-year/30-year yield spread continues to dis-invert, closing the week at -35 basis points.
With the rise in rates, the average mortgage rate hit a 23-year high of 7.31%, up from last week’s high of 7.19%. The rise in the cost of financing a home will offer no solace to the beleaguered housing market.
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.