Economic Commentary
- Headline CPI rose +0.4%, in line with forecasts. Energy prices accounted for more than 40% of the increase. Core CPI rose +0.2%, less than the +0.3% consensus and the first monthly slowdown since June. The YoY rate declined to 3.2%, marking the first drop since July. After three consecutive months of 0.3% increases in the core CPI, there’s no doubt yesterday’s 0.22% gain is good news. Year-ago base effects will become more favorable in the coming months too, which will help lower the year-on-year changes. At 4.26%, the 3-month/3-month annualized rate of change for Owners’ Equivalent Rent (OER), one of the stickier components in the inflation fight, is also at its lowest since 2021.
- December PPI was cooler-than-expected, both headline and core. Year-over-year headline PPI was 3.3% versus expectations of +3.5%, and core PPI was 3.5% versus the consensus of 3.8%.
- The December jobs report showed surprising strength last Friday. Payrolls grew 256k versus the 165k consensus, and the unemployment rate ticked down from 4.2% to 4.1%.
- The International Longshoreman’s Union strike was averted a week before the strike date. In addition to a 62% pay hike, negotiated last year, the union blocked full port automation. In addition, for every partially automated crane installed in a port, the port must add one more worker. It is a good compromise, for now, as it will increase employment the cost of which should be more than offset by productivity gains.
- December retail sales rose 0.4%, short of the 0.6% consensus, though November sales were revised up a tenth, softening the miss. Sales ex-autos and gas rose 0.3%, while the retail sales control group rose 0.7%.
Our take: CPI and PPI reports this week have produced a bond rally. Treasury Secretary nominee Scott Bessent projected confidence and adult behavior in his Senate confirmation hearing today, which is also providing a bit more juice to the rally. However, any notion that this will be followed by calm or further lowering of rates is likely premature. One month does not make a trend, so we’ll need to see continued moderation of inflation readings; easier comparisons in the next several months should help the cause. We also need to get a read on tariff, trade, immigration and other policies of the new administration to gauge their impacts on inflation, the economy, and the deficit. Q1 should be quite a ride…
Corporate Bond Market Commentary
- IG spreads were unchanged at +83bp and total returns were -0.91%.
- Fund flows were +$342 million.
- New issue supply was $59.9 billion and was easily digested, with order books averaging 3x, new issue concessions were a minimal 3.4 bp, and attrition was slightly higher at 23%.
- HY spreads were unchanged at +281. Total returns were -0.31% (BBs -0.33%, Bs -0.34%, CCCs -0.18%).
- Fund flows were +$189 million.
- New issue supply was $3.3 billion.
Our take: Interest rate gyrations are predictably driving bond market performance, and until rates stabilize this will continue to be the case. Investment grade supply has been a steady gusher since the start of the year but has been easily absorbed. High yield supply has been slower to ramp up, and indications are that it will remain modest through January before picking up more in February. This is supportive for HY performance, as cash balances at funds and large coupon and principal payments bolster those coffers more, while limited new issuance forces managers to buy existing bonds in the secondary market. Earnings season kicked off, with strong performance by the large banks. Corporate and industrial issuers will follow, and we will be carefully parsing these results for indications about how 2025 is shaping up, and how management teams are planning for policy, regulatory, and tariff and other potential impacts on their businesses.
Municipal Bond Market Commentary
- The week ending January 10 saw yields resume rising in the first full trading week of the year. AAA muni yields were up 16, 12, 15, and 25 bp at 2, 5, 10 and 30 years while US Treasury yields were up 10, 16, 16, and 14 bp at 2, 5, 10 and 30 years.
- AAA Muni/Treasury ratios were unchanged at 2 and 5 years, up 1% at 10 years, and up 3% at 30 years to end the week at 65%, 65%, 68% and 83%. AA Muni/AA Corporate ratios were down 1% at 2 and 5 years, unchanged at 10 years and up 1% at 30 years to end the week at 64%, 62%, 63% and 76% at 2, 5, 10 and 30 years.
- Municipal bond funds had inflows of $841 million for the period ending 1/8/25.
- Muni issuance is expected to be around $12 billion in this week.
Our take: Fed monetary policy, uncertainty about the Trump administration’s fiscal policies and whether a narrow Republican majority in Congress can deliver Trump’s agenda continue to be the focus of the market. The next few weeks will be very informative with the inauguration on January 20 and cabinet confirmation hearings underway. Municipal bond relative value technicals continue to be favorable with negative net supply and flows have turned positive again – historically concerns about economic growth have led to positive fund flows for municipal bonds.
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