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
4/12/24 – Sticky inflation forces rethink on Fed’s December pivot
If you’re thinking there has been a sea change in expectations this week, it’s because there has been. The March Consumer Price Index slammed the door on any hopes of a near-term rate cut with the year-over-year core CPI rising 3.8%. The CPI seems to have settled in at the 3.8% annual rate which is a level that is too high for the Fed to cut interest rates anytime soon. Reflecting that, many of the “Street” economists have withdrawn their forecast for a June rate hike and the possibility of two additional cuts this year and have now taken the safe forecast of one rate cut this year coming at the December meeting. Indeed, the Fed Fund futures have priced in a singular rate cut in the December contract.
That repricing of the overnight rate is having a direct impact on the price of the U.S. dollar as investors and traders are anticipating a widening of the interest rate differential between FX pairs. The cost of one pound Sterling traded below 1.25 for the first time since last November. Similarly, the Euro is closing the week at 1.065, again the cheapest since last November.
In addition to the disappointing inflation report, capital markets are closing the week based on threatening geopolitical news. The price of West Texas intermediate crude oil is the highest it’s been in almost two years, driven higher by fears of a worsening conflict in the Middle East. That will do little to put downward pressure on inflation in next month’s report.
Also making headlines this week was the sharp rally in the price of gold. The commodity, which is widely considered an inflation hedge, has struggled to break above $2,100/ounce. This week it did so with significant follow-through. The precious metal is set to close the week at $2,350/ounce after trading as high as $2,450 earlier today, enjoying the same flight-to-quality that’s driving the price of oil higher. Coincidently, the Wall Street Journal ran a story this week about how Costco began selling one ounce gold bars at retail location last year. While we doubt that the sales are having much effect on the current rally, the news is likely a contributor to the price rise.
Next week the government will release data on retail sales and housing. We’ll be watching to discern if the steady rise in interest rates since the beginning of the year has dented consumers’ ability and propensity to spend.
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.
399 Knollwood Road
Suite 107B
White Plains, NY 10603
Halyard’s Weekly Wrap – 6/9/23
/in Weekly Wrap/by halyardIn a week devoid of market-moving news, the S&P 500 continued what some are calling a breakout rally. The index is closing less than 1% below the all-time high of 4325 touched last August. The rally is surprising given that the Fed Funds futures market is anticipating at least one more rate hike by the Fed. The Fed has been in their quiet period this week, so traders were forced to speculate on what may have changed in their thinking. As we closed out the week last Friday, Fed speakers seemed divided on another rate hike at the June meeting. They are going to be challenged to make a snap decision as the CPI index for May is released on the morning of their first day of deliberations.
Halyard’s Weekly Wrap – 6/2/23
/in Weekly Wrap/by halyardThe best news of the week is that the debt ceiling issue has been resolved, at least until January 2025. The news eased investors fear that a default by the U.S. government would collapse the entire financial system. We won’t have to worry about that again for another 18 months. As expected, the default premium investors built into the front end of the bill curve has entirely vanished and nearby bills are trading near 5% – off the high of 7% touched just two weeks ago.
Halyard’s Weekly Wrap – 5/26/23
/in Weekly Wrap/by halyardOur expectation that traders would overlook fundamental data this week and instead focus on the debt ceiling stalemate proved prescient. The one release that took the market by surprise were the minutes of the May FOMC meeting. Thinking back to the Q&A session that followed that meeting, we interpreted Powell’s comments as closing the door on a June rate hike, but the minutes told a different tale. The Bloomberg story following the release read “Officials were divided over path of rates with more favoring a pause.” “More” is clearly not a consensus and traders immediately took notice and hit the bid in the futures market.
Halyard’s Weekly Wrap – 5/19/23
/in Weekly Wrap/by halyardThe headline economic report this week was Retail Sales and, for the most part, it told the story of a resilient consumer. The headline result rose 0.4% over the March reading, which you may recall was an abysmal -1.0%, month-over-month. March’s outcome was revised to a simply dreadful -0.7%. On balance, the market ignored the data, choosing instead to obsess about the debt limit impasse. Treasury Secretary Yellen reiterated her concern that the U.S. would default as soon as June 1st if an agreement to raise the ceiling isn’t reached before then. The Treasury Bill market has priced in a default, with early June Bill maturities offering a yield-to-maturity of as much as 5.5%, more than 0.50% higher than Bills maturing a month later. Ironically, the rest of the yield curve, as well as the stock market are trading as though an agreement of the ceiling will be reached. We agree that a deal is most likely to be reached and the market will again return to trading on fundamentals, but as we get closer to the drop dead date, we expect that volatility will rise.
Halyard’s Weekly Wrap – 5/12/23
/in Weekly Wrap/by halyardAll eyes were on the release of the most recent inflation data this week. Both the CPI and PPI came in better than expected as inflation continues to cool. Consumer prices rose 4.9% year-over-year, the smallest rise in two years, but still well above the Fed’s target of 2%. The Producer Price index was much better than expected with year-over-year final demand inflation registering 2.3%. Be forewarned though; producer prices have a low predictability of the direction of consumer prices.
Halyard’s Weekly Wrap – 5/5/23
/in Weekly Wrap/by halyardTed Lasso encourages his players to “Be a Goldfish” because the animal only has a 10 second memory. We think the Federal Reserve is taking this advice literally.
The most consequential story of the week came out on Tuesday, the day before the FOMC announcement. The Treasury Buyers Advisory Committee (TBAC) released the minutes of their quarterly meeting with the Treasury Department. The TBAC is a high-level group of money center banks and Treasury bond buyers that meets with Treasury officials quarterly to discuss operations of the Treasury bond market. The Treasury asked the TBAC what the tolerance would be for Treasury buying back bonds in the open market. We were floored! The current environment in which we find ourselves can be laid entirely at the foot of the Federal Reserve and the irresponsible monetary policy it has pursued. That they are even considering resuming market manipulation is unspeakable.