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 – 6/30/23
/in Weekly Wrap/by halyardThe hawkishness espoused by Chairman Powel last week was repeated on Wednesday and Thursday of this week as Central Bankers from the U.S., Europe, U.K., and Japan gathered in Sintra, Portugal to compare notes on inflation. The remarks offered much more substance than the post-FOMC press conference and Powell’s testimony before Congress.
Halyard’s Weekly Wrap – 6/23/23
/in Weekly Wrap/by halyardHawkishness dominated the conversation this week as Chairman Powell presented the annual state of the economy to Congress. His comments were broadly in line with his post-FOMC comments from last week, with emphasis that the June pause was just that and that the overnight rate is likely to rise further later this year, perhaps even twice. The market took notice, pushing the 5-year Treasury note above 4.0% for the first time since February. Similarly, the April 2024 Fed Fund future traded above 5.00% this week as traders speculated that the overnight rate will remain high into next year.
Halyard’s Weekly Wrap – 6/16/23
/in Weekly Wrap/by halyardChairman Powell must have re-watched the May 3rd post-FOMC press conference and not liked what he saw. Recall that he was called out by CNBC’s Steve Liesman for his tepid answer when questioned about his knowledge of the issues surrounding Silicon Valley Bank. His demeanor at the Wednesday conference was quite the opposite. His first words, delivered in a forceful tone were “My colleagues and I remain squarely focused on our dual mandate…”, as if daring any of the reporters to assume otherwise.
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.