Economic Commentary
- President-elect Donald Trump has announced he will nominate hedge fund manager Scott Bessent as Treasury secretary. The decision has been met with some relief from financial market participants who, at least anecdotally in Bloomberg reports, view Bessent as a solid pick who will be a steady hand at the Treasury department.
- New home sales plunged to 610K in October, from 738K, well below the consensus, 725K.
- The headline Conference Board consumer confidence index rose to 111.7 in November, from 109.6 in October, slightly below the consensus, 111.8. The survey’s question about current labor market conditions has been largely unaffected by politics in the past, so the drop in the proportion of consumers saying jobs are hard to get to 15.2% in November, from 16.8% in October, provides reassurance that the labor market is weakening gradually, rather than rapidly. Nonetheless, the net balance saying jobs are hard to get, less those saying they are plentiful, still is consistent with a slight increase in the unemployment rate from October’s 4.1% over the next couple of months.
- The minutes of November’s FOMC meeting reveal little beyond what we already know from many individual members’ speeches since then, including Chair Powell’s on November 14. The Committee continues to envisage that “it would likely be appropriate to move gradually toward a more neutral stance of policy over time”. They remain uncertain about the level of neutral rates but intend to proceed more cautiously soon as the easing cycle continues. The Committee steered clear of discussing the economic implications of the elections. The Committee, however, reiterated that it is open to changing course, either by pausing rate cuts or accelerating them, if the data or the balance of risks shift unexpectedly.
- The core PCE deflator rose 0.3% in October, matching the consensus. Net revisions were zero. This was the largest increase since March and pushed the inflation rate up to 2.8%, from 2.7% in September.
- Personal income and spending revisions reveal a weaker trend in household income growth and a lower saving rate. Real consumption rose by 0.1%, slightly below the consensus, 0.2%. Net revisions were zero. Nominal personal incomes increased by 0.6%, above the consensus, 0.3%. But net revisions were -0.5%.
Our take: Sluggish personal income growth casts renewed doubt over the sustainability of strong growth in consumers’ spending. Real after-tax income rose by 0.4% In October, but data for previous months were revised down, so the annualized growth rate in the three months to October, compared to the previous three months, was only 1.1%. This year’s robust growth in spending has relied significantly on households saving less. October’s 4.4% personal saving rate is well below the 5.5% rate at the start of this year and the 2015-to-19 average of 6.1%. The recent rally in stock prices, as well as the greater likelihood of temporary tax cuts being extended in the wake of the elections, likely will spur high-income households to maintain a low saving rate. But households outside of the top 20% of the income distribution hold few stocks outside of their pensions and no longer have liquid assets in excess of the level implied by the slowly rising pre-Covid trend. Furthermore, the low level of hiring likely will spur some households to seek a larger savings buffer. Therefore, we think the saving rate likely is close to its floor and expect growth in spending to converge towards income growth next year. We are already seeing evidence of this in the recent earnings and outlooks of retailers, who are broadly citing caution or weakness at the lower- and middle-income cohorts.
Corporate Bond Market Commentary
- IG spreads were unchanged at +80bp and total returns were +0.14%.
- Fund flows were +$1.517 billion.
- $36.8 billion of new issuance priced.
- HY spreads were 11bp tighter to +261bp and total returns were +0.35% (CCCs +0.42%, BBs +0.35%, Bs +0.32%).
- Fund flows were +$440 million.
- New issue supply was $3.91 billion.
Our take: Recent interest rate stability has allowed returns to grind slightly higher and recoup a small portion of the significant rise in yields since mid-September. At the same time, markets are reading the tea leaves on cabinet appointments to try and extrapolate to which industries and companies will be the winners and losers as a result of trade, immigration, de-regulation, and any other policy changes implemented by the next administration. These changes will likely increase volatility, and this single-name or industry-level dispersion will be a welcome development for actively managed funds, especially those who do fundamental credit analysis and are not afraid to be contrarian. Giddy-up!
Municipal Bond Market Commentary
- The week ending November 22 saw little change in yields. AAA muni yields were down 2, 1, 2, and 5 bp at 2, 5, 10 and 30 years while the US Treasury yields were up 7, and down 1, 4, and 3 bp at 2, 5, 10 and 30 years.
- AAA Muni/Treasury ratios were down 2% at 2 years, unchanged at 5 and 10 years and down 1% at 30 years to end the week at 60%, 63%, 67% and 80%. AA Muni/AA Corporate ratios were down 3% at 2 years, unchanged at 5 years, down 1% at 10 years and unchanged at 30 years to end the week at 61%, 61%, 63% and 76% at 2, 5, 10 and 30 years.
- For the period ending November 20 municipal bond funds had inflows of $1.3 billion, marking 21 consecutive weeks of inflows.
- New issue supply is very light due to the Thanksgiving holiday, expected to be around $1.5 billion this week.
Our take: No commentary changes from last week as markets continue to watch economic numbers, especially those related to employment and inflation, though the upcoming week is relatively quiet with regard to economic data releases. Potential impacts of the coming Trump administration are being analyzed as cabinet picks are announced. Municipal bond relative value supply/demand technicals continue to point to net demand with lower issuance, increased reinvestment dollars, and strong recent fund flows.
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