Economic Commentary
- September CPI rose faster than the consensus expectation , both headline and core, but the 0.312% core increase is still consistent with modest price pressures in the Fed’s preferred core PCE deflator.
- In the latest NY Fed’s Consumer Expectations Survey, 13.6% of respondents expect to not make a minimum debt payment over the next three months, the highest since April 2020.
- UK inflation came in much lower than expected in September. The headline CPI rose 1.7% year-on-year, the first sub-2% reading since April 2021.
- The headline September PPI was unchanged, below the consensus, 0.1%. Net revisions were +0.2%. The core PPI increased by 0.2%, matching the consensus. Net revisions were +0.2%. The details of the PPI report, however, suggest that disinflation trends remains well-embedded.
- Retail sales rose 0.4% in September, a tenth higher than the consensus estimate. Ex-autos, sales rose 0.5%, well above the 0.1% consensus estimate. Control group sales rose 0.7%, more than double the consensus expectation.
- The Atlanta Fed’s GDPNow estimate was revised up to 3.418% today after these recent data releases.
- The FOMC quiet period begins next Friday, and there are no further appearances scheduled for Powell.
Our take: Recent economic data suggests that the economy is still growing at a healthy pace and is heading towards a no-landing or at worst a soft-landing scenario. This may be true but given lower than normal response rates to many of the data collection surveys these numbers are based on, revisions could be unpredictable. The lower end consumer seems to be stressed, and some portion of the middle class likely is hurting as well. Adding to the uncertainty is the potential for escalation in the Middle East conflict, and the upcoming US election. Given the range of possibilities and the lack of certainty around them, staying a bit more neutral on rates and credit is prudent until more clarity emerges. We could easily paint scenarios that have the 30yr US Treasury bond selling off on account of concerns for a new administration’s potential profligate spending and recurrence of inflation, but another credible possibility is a massive flight to quality if tensions escalate in the Middle East, or a reversal of rates if upcoming economic data surprises to the downside coupled with recent strong data getting revised lower when revisions come out.
Corporate Bond Market Commentary
- IG spreads tightened 3bp to +84bp but higher UST yields drove total return losses of -0.41%.
- Fund flows were +1.8 billion into IG.
- New issue supply was $16 billion last week, and is light this week given the holiday weekend and earnings blackouts.
- HY spreads widened 9bp to +298bp and total returns were -0.27% (BBs -0.36%, Bs -0.26%, CCCs +.06%).
- Fund outflows were $-140 million out of HY.
- New issue supply was $4 billion.
Our take: Technicals in the corporate bond market continue to be strong and supportive. Fund flows have been consistently positive in IG and largely positive in HY, and new issue supply has remained manageable. This has caused spreads to tighten to historically tight levels. All-in yields are a bit higher given the recent rise in UST rates. If the economy is going to avoid a hard landing, company creditworthiness should remain strong, but interest rates will likely be rangebound and not a tailwind for future performance. Total return will come largely from coupon income. This kind of market is one where active management can find idiosyncratic situations and outperform more passive strategies that are content to merely clip coupon payments.
Municipal Bond Market Commentary
- US Treasury and muni yields continued the month long trend to higher rates for the week ending October 11. Municipal bonds underperformed on the short end and outperformed at the long end as AAA muni yields were up 9, 11, 12, and 10 bp at 2, 5, 10 and 30 years while US Treasury yields were up 3, 10, 13, and 16 bp at 2, 5, 10 and 30 years.
- AAA Muni/Treasury ratios were 1% higher at 2, 5, and 10 years and 1% lower at 30 years to end the week at 63%, 64%, 67% and 84%. AA Muni/AA Corporate ratios rose 4% at 2 years, 3% at 5 and 10 years, and were down 1% at 30 years to end the week at 65%, 63%, 66% and 78% at 2, 5, 10 and 30 years.
- For the period ending October 9 municipal bond funds had inflows of $579 million, the 15th consecutive week of reported inflows.
- There is a large muni new issue calendar, expected to be $13.5 billion this week.
Our take: Markets continue to watch economic numbers, especially those related to employment and inflation, trying to divine signs of economic slowdown and the timing of future Fed rate cuts now that the easing cycle has begun. This week stronger than expected CPI and PPI contributed to the move to higher yields. At this point the speed of FOMC rate cuts may be debated and it could be questioned whether the first cut should have been 25 or 50 bps, but there has yet to be any data so strong as to cause the FOMC to second guess the cutting cycle. Municipal bonds will be pressured by supply/demand technicals in the near term as heavy supply is expected to outpace reinvestment dollars, and dealers report buyers are becoming tentative in the secondary market. This could be moderated by municipal fund inflows, which have been robust recently and have also been historically strong during periods of economic slowdown.
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