Economic Commentary
- The preliminary March manufacturing PMI index fell from 52.7 to 49.8, but the services index jumped from 51.0 to 54.3, lifting the composite index from 51.6 to 53.5.
- Consumer confidence dropped to 92.9 versus 100.1 in the prior month and estimates of 94.0, the lowest reading since January 2021.
- Home sales increased 1.8% but were below expectations of 3.5%. Anecdotal comments from homebuilder earnings calls this week suggest the housing market is weakening into the all-important spring selling season.
- Durable goods orders were better than expected, with headline orders +0.9% versus expectations of -1.0%, and nondefense ex-aircraft orders -0.3% versus expectations of +0.2%. It is too soon to tell if some of the strength was front-running ahead of expected tariffs, or actual underlying decent activity.
- Incorporating new data, the Atlanta Fed’s GDPNow estimates 0.2% Q1 GDP growth after adjusting for gold’s statistical quirks in international trade, virtually unchanged over the last three weeks.
- President Trump announced 25% tariffs on all cars not made in the U.S., effective April 2nd.
- The GDP Price Index and the Core PCE Price Index both came in slightly cooler than forecasts, at 2.3% and 2.6% respectively.
Our take: There is way too much uncertainty to discern a future direction for the economy. Backward-looking data is mixed and likely has distortions from attempts to front-run tariffs. Real-time concurrent data suggests slowing activity – airlines, homebuilders, retailers – which is understandable given the uncertainty around job cuts in the federal government and major changes to trade policy. Given that the Administration is conditioning markets to blame the prior administration for the economy until at least Q3, if not Q4, we should take their word for it that things will be weak and messy for at least 6 months.
Corporate Bond Market Commentary
- IG spreads were 2bp tighter to +92bp and total returns were +0.60%.
- Fund flows were +$376 million.
- New issue supply was $33 billion, slightly below expectations. Concessions reverted to more normal levels of 3.8bp, order books were 3.6x oversubscribed, and attrition was only 11%
- HY spreads were 4bp tighter to +321bp and total returns were +0.45% (BBs +0.47%, Bs +0.40%, CCCs +0.49%).
- Fund flows were +$1.108 billion, rebounding from last week’s outflow.
- New issue supply was $3.8 billion.
Our take: We think that once the rules of the road become clearer, whenever that may be but perhaps as soon as next week, businesses can start to estimate the impacts, disclose them to the market, and make decisions about how to mitigate or plan for these changes. This greater certainty should provide a clearing event for the market, with some of the perceived winners recovering somewhat, while the losers will be punished, in some cases severely. Proper underwriting of credits to avoid downside and capture some recovery will be the key over the next weeks and months.
Municipal Bond Market Commentary
- Muni and US Treasury yields were slightly lower for the week ending March 21. AAA muni yields were down 2, 1, 1, and 4 bp at 2, 5, 10 and 30 years while US Treasury yields were down 7, 9, 7, and 3 bp at 2, 5,10 and 30 years.
- AAA Muni/Treasury ratios were up 2% at 5 years and unchanged elsewhere to end the week at 66%, 70%, 71% and 91% at 2,5,10 and 30 years. AA Muni/AA Corporate ratios were up 2% at 2 and 5 years, up 1% at 10 years and down 1% at 30 years to end the week at 67%, 67%, 68% and 82% at 2, 5, 10 and 30 years.
- Municipal bond funds had outflows of $216 million for the weekly period ending March 19.
- Muni new issue volume is expected to be around $9 billion this week.
Our take: We expect upward pressure on AAA muni/UST ratios in the next few weeks as municipal fund flows are likely to be negative as investors pay their taxes combined with steady new issuance and a seasonal drop in reinvestment dollars. Overall day to day volatility in the municipal market will continue to be driven by the volatility in the benchmark US Treasury market related to fears of economic slowdown, inflation, and uncertainty around tariffs.
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