Economic Commentary
- June CPI data overall was in line at +0.3% month over month but did show some inflationary pressures in certain tariff-exposed sectors such as apparel and furniture. Price increases in tariff-affected items were largely offset by weakness elsewhere in the report.
- PPI was unchanged in June, below expectations of +0.2%, and the 0.3% May increase was offset by April’s 0.3% drop. The PPI is actually a tenth lower since peaking in February.
- Average hourly earnings were only up 1.0%, down from 1.4% in May, a further sign that the labor market is not currently a source of inflation.
- Initial jobless claims were 221k, down from a revised 228k last week. Continuing claims were steady at 1.956 million. So far, companies are not reacting by laying off more workers.
- June retail sales rose 0.6%, easily beating the 0.1% consensus. Sales ex-autos and gas rose 0.6% as well, while the control group was up 0.5%. Headline sales were not revised, but sales ex-autos and gas were revised up a tenth while control group sales were revised down two tenths.
- Fed Chair Jerome Powell has reportedly again been the subject of internal discussions within the administration regarding a possible forced early departure before the end of his term next May, with some going so far as to draft a letter to remove Powell. While no official actions have been confirmed, markets continue to monitor developments closely given the importance of Fed independence.
- In the Fed’s Beige Book, economic activity increased slightly from late May through early July. Five districts reported slight or modest gains, five had flat activity, and the remaining two districts noted modest declines in activity. That represented an improvement over the previous report, in which half of Districts reported at least slight declines in activity. Uncertainty remained elevated, contributing to ongoing caution by businesses.
Our take: The overall economic picture is still unclear. There are signs of price increases in certain goods sectors, while other sectors are not yet revealing elevated prices. At the same time, services prices are moderating. Given that the labor market is at best stable, but certainly not overheated, consumers should have a finite amount of dollars to spend. If forced to pay more for certain items, it is logical to expect that they will push back on prices for other items or spend less on non-discretionary goods or services. If this pattern were to continue, it would allow the Fed to get comfortable that price increases will not be long-term inflationary across the board, and could begin cutting rates in September. Those companies in tariff-impacted sectors should eventually respond with layoffs, and the Fed will want to get out ahead of any further weakness in the labor markets. As it relates to attacks on Chairman Powell, markets would potentially not look kindly upon a forced removal, as it would jeopardize Fed independence. In practical terms, even if it were to happen, a very dovish replacement Chair would still not be able to impose their will upon all of the other members of the FOMC. Powell is more convenient left in place as a punching bag and scapegoat than replacing him before his term ends, but the headlines will likely continue to rattle markets on a regular basis.
Corporate Bond Market Commentary
- IG spreads widened 3bp to +83bp and total returns were -0.55%.
- IG fund flows were +$4.9 billion.
- New issue IG supply was $29.9 billion across 15 issuers. NICs were elevated at 8.6bp but these were skewed by the $11.25 billion jumbo NTT Finance deal. Excluding this deal, NICs were 4bp, orderbooks were 3.4x, and attrition was 20%. Spreads tightened an average of 30bp from IPT to final pricing.
- HY spreads widened 17bp to +297bp and total returns were -0.27% (BBs -0.37%, Bs -0.31%, CCCs +0.33%).
- HY Fund flows were +$500 million.
- New issuance in HY was $8.175 billion led by deals from Carnival, Gray Media, and Nissan.
Our take: Corporate credit markets leaked a bit last week on account of rising UST yields and some apathy towards current valuations. Earnings season is just getting underway and should provide some activity and volatility, both good and bad. New issuance has cooled a bit and high yield issuance in particular has been of the cats & dogs variety. This should improve as we get through earnings over the coming weeks, but seasonality will be working against markets as traders and portfolio managers ramp up summer vacations. We have trimmed a bit of risk and built a bit of firepower in anticipation of better entry points and new opportunities in the days and weeks ahead.
Municipal Bond Market Commentary
- Bond markets feeling Déjà vu; in a repeat of the prior week municipal bond yields fell everywhere but the long end while US Treasury rates moved higher across the curve in the week ending July 11, 2025. AAA muni yields were -6, -5, -3, and +4 bps at 2, 5, 10 and 30 years and US Treasury yields were +1, +4, +6 and +9 bps at 2, 5, 10 and 30 years.
- The muni outperformance drove AAA Muni/Treasury ratios lower, -1% at 2 and 30 years and -2% at 5 and 10 years to end the week at 65%, 66%, 72% and 93% at 2, 5, 10, and 30 years. AA Muni/AA Corporate ratios also moved lower across most of the curve, -2% at 2, 5, and 10 years and unchanged 30 years to end the week at 62%, 64%, 70%, and 88% at 2, 5, 10, and 30 years.
- Municipal bond funds had inflows of $432 million for the weekly period ending July 9.
- The new issue calendar is expected to bring $14.1 billion of issuance this week.
Our take: The muni market continued to outperform Treasuries, as was expected to be the case due to seasonal market technicals. Inflows remained positive for the 7th consecutive week, which combined with high reinvestment dollars from called and matured bonds continued to provide strong support for municipal bonds. Though still subject to the influence of the benchmark US Treasury market where yields have been moving higher, we anticipate continued solid relative performance of municipal bonds in the near term.
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