Economic Commentary
- Minneapolis Fed President Neel Kashkari told CNBC “the odds of a rate hike are low, but that I don’t think anybody has totally taken rate increases off the table.” This comment seemed to spook the rates market.
- May preliminary S&P PMIs were higher than expectations and pushed Treasury yields up. The moves showed the bond market is sensitive to suggestions that Q2 growth was not as weak as some of the surface-level April data have suggested. These PMIs do not have the same track record as the ISMs, which themselves have been less reliable during the pandemic, but the strength indicates that robust growth continued into the second quarter.
- University of Michigan consumer sentiment and expectation indices strengthened while inflation expectations ticked down a bit.
- UST auctions this week were relatively weak and contributed to higher rates in the early to middle portion of the week.
- The Fed’s Beige Book notes the economy continued to expand from early April to mid-May in most districts, but unevenly. “Overall outlooks grew somewhat more pessimistic amid reports of rising uncertainty and greater downside risks.” Job growth was moderate. “Contacts in most Districts noted consumers pushed back against additional price increases, which led to smaller profit margins as input prices rose on average.”
- The GDP Price Index and the Core PCE Price Index both came in 0.1% lower vs both expectations and the prior quarter.
- Q1 GDP was revised down from 1.6% to 1.3%, in line with expectations.
Our take: Second tier economic data has been mixed over the last week, while Fed speakers provide mixed but marginally hawkish messaging and UST auctions underperformed. All of this combined to push rates around 20bp higher, before receding today on the GDP Price Index / Core PCE Price Index data. We continue to believe we will be range bound at these relatively higher levels until the economy starts to slow, with an upside breakout more likely than a significant rally to lower rates less likely in the near term. More economic data over the next two weeks leading up to the June 12th FOMC meeting and updated dot plots should be more illuminating.
Corporate Bond Market Commentary
- IG spreads were unchanged again at +89bp but the rate move pushed total returns down -0.17%.
- Fund flows were -$217 million.
- Issuance was approximately $26.1 billion last week, new issue concessions were 5bps and books were 3.6x oversubscribed.
- HY spreads widened 2bp to +311bp and total returns were -0.20%.
- Fund flows were +$1.672 billion.
- 15 borrowers issued bonds this week totaling $11.2 billion.
Our take: A soft week of performance last week turned uglier after the holiday weekend as UST rates pushed higher. Retailer earnings are painting a mixed picture of consumer health, with Kohls and Best Buy showing weakness while Foot Locker, Dick’s, Birkenstock, and Burlington showed more resiliency, indicating that perhaps the lower to middle tier consumer is struggling, while specialty and higher-end consumers continue to spend. This makes logical sense, as lower end consumers have more of their budget eaten-up by inflation in everyday items, while higher end consumers have the ballast from home price appreciation and stock market wealth. Dispersion in corporate performance is increasing, which indicates that portfolio positioning needs to be even more focused on avoiding downside surprises.
Municipal Bond Market Commentary
- The week ending May 24 was a relatively slow week for economic data but with another large issuance calendar muni yields moved higher. AAA muni yields were 15, 31, 34 and 3 bps higher at 2, 5, 10, and 30 years. The AAA municipal bond curve underperformed US Treasuries where yields rose 12, 8, 5, and 1 bp at 2, 5, 10, and 30 years.
- AAA Muni/Treasury ratios rose substantially in the middle of the curve, up 1% at 2 years, 6% at 5 years, 7% at 10 years, and 1% at 30 years, to end the week at 66%, 67%, 67% and 85%. AA Muni/AA Corporate ratios also rose, 3% at 2 years, 5% at 5 years, 6% at 10 years, and 2% at 30 years to end the week at 67%, 66%, 65% and 77%.
- For the weekly period ending May 22, Lipper reported municipal bond fund outflows of $217 million.
- The muni new issue calendar is expected to be around $5.6 billion this week, only the second time in the last six weeks issuance has been below $10 billion.
Our take: It seems likely that the market will remain in a range until we see some clear month-over-month trends in economic and inflation data, but the PCE Deflator data to be released on Friday is the FOMC’s favorite inflation measure. The US Treasury and muni markets will be focused on the PCE data, next week’s Nonfarm Payrolls data, Fed speakers and market supply technicals. Though the ratios rose this week, Municipal bonds remain rich relative to US Treasuries and continued upward pressure on US Treasury/AAA muni ratios is likely if new issuance calendars remain large.
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