Economic Commentary
- The Citi Economic Surprise Index has rolled back into negative territory.
- Both the ISM Services and Manufacturing indices were weaker than expected in May. The ISM Manufacturing index slipped two tenths to 48.5, reflecting weaker orders and employment. The prices paid component fell four tenths to 69.4, still high due to tariff-related price pressures. The ISM Services index slipped into contraction for the first time since June 2024, falling to 49.9.
- Headline CPI was +0.1% month over month and +2.4% year over year, both a bit below consensus of +0.2%. Core CPI rose +0.1% and +2.8%, below expectations of +0.3% and +2.9% respectively. Energy, vehicles & parts, and apparel were cooler, while food, shelter, and medical goods were among the hotter categories. This is the fourth consecutive month of data consistent with the Fed’s longer-run 2% target.
- The PPI rose 0.127% in May after back-to-back declines in March and April. The core (ex-food, energy and trade services) rose 0.050%. These were expected to rise 0.2% and 0.3%, respectively. After the release, the Bloomberg Economics inflation surprise index, which compares inflation forecasts to reality, dropped to its lowest since 2020.
- The NY Fed’s survey of one-year inflation expectations fell from 3.63% to 3.20%, the first decline since October.
- The NFIB small business optimism index rose in May from 95.8 to 98.8. The biggest improvement was in optimism about the future of the economy.
- Initial jobless claims were 248,000, slightly above the 242,000 estimate. However, continuing claims of 1.956 million were above the 1.910 million estimate and have been climbing slowly but steadily. Considering the downward revisions to March and April payrolls, a massive drop in the household survey’s level of employment, and a 0.2 percentage point decline in the labor force participation rate, all of these are pockets of labor market weakness. If these trends continue, the Fed will have more reason to think about cutting rates to protect the labor market.
Our take: Overall CPI and PPI were softer than expected. Parsing the numbers suggests that tariff-sensitive categories did in fact show increases (appliances, tools & hardware, video & audio equipment), however less vulnerable categories were generally softer. This could suggest that consumers are managing higher prices in tariff-driven categories by reducing spending in others where possible, or pushing companies in categories with more price elasticity to cut prices in the face of weaker demand. If this trend were to continue, it would tamp-down concerns about runaway inflation from tariffs. The timing could not have been better to support the US Treasury market in the face of 10-year and 30-year auctions this week. While next week’s Fed meeting should still be relatively uneventful, the updated Summary of Economic Projections could shed some light on whether September is enough time for the FOMC to get a handle on tariffs and the softening labor market and start to gradually cut rates again.
Corporate Bond Market Commentary
- IG spreads tightened 4bp to +87bp but higher UST rates drove negative total returns of -0.20%.
- Fund flows were +$4.9 billion.
- New issue supply was $26.2 billion across 23 issuers, modestly below expectations for $30 billion. New issue concessions were 1.8bp, books were 3.5x covered, attrition was 24%, and average deal tightening was 26bp, all generally in line with recent trends and consistent with a balanced market.
- HY spreads tightened 22bp to +309bp and total returns were +0.35% (BBs +0.36%, Bs +0.46%, CCCs +0.01%).
- Fund flows were +$2.0 billion.
- HY new issue supply $13.25 billion, the busiest week since May 2024.
Our take: The strong run of performance continued, even in the face of increased supply. The overall risk environment has been very supportive throughout the cooling off period on tariffs. It feels inevitable that another bout of headlines and volatility are coming, perhaps during the seasonally weaker summer period when trading liquidity is a bit lower. Management teams should have gained a bit more visibility on how their supply chains are reacting, what their mitigation plans are, and how customers are behaving in the face of uncertainty and price increases when they discuss second quarter earnings beginning in mid July. This could also provide a jolt of single-name volatility. We are actively playing the increased new issue calendar, and have also increased hedges during this period of complacency.
Municipal Bond Market Commentary
- US Treasury yields rose across the curve as short muni yields fell and long muni yields moved higher during the week ending June 6, 2025. AAA muni yields were -4, -3, +1, and +4 bps at 2, 5, 10 and 30 years and US Treasury yields were +14, +16, +11, and +4 bps at 2, 5, 10 and 30 years.
- AAA Muni/Treasury ratios fell 3%, 4%, and 1% at 2, 5, and 10 years and were unchanged at 30 years to end the week at 68%, 69%, 74% and 92% at 2, 5, 10, and 30 years. AA Muni/AA Corporate ratios fell 1% at 2 and 5 years and 1% at 5 years, were unchanged at 10 years, and up 1% at 30 years to end the week at 68%, 67%, 71%, and 87% at 2, 5, 10, and 30 years.
- Municipal bond funds had inflows of $426 million for the weekly period ending June 4.
- Another large new issue calendar is expected to bring $17 billion in deals this week.
Our take: The prior week’s new issue volume was the highest since December 2017, but the muni market has been firm, slightly outperforming US Treasuries in the last week. The market has been bolstered by recent investor inflows and reinvestment income of $30 billion in June and $39 billion coming in July.
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