Economic Commentary
- Nonfarm payrolls rose to just 73k, well below the 104k expectation, and prior months were revised sharply lower by 258k. Factoring in downward revisions to the prior two months, 3-month average payrolls growth is now a meager 35k.
- The unemployment rate rose to 4.2% on a decrease in the participation rate.
- The number of people unemployed for 27 weeks or longer hit a new cycle high in July.
- Several Fed governors have made comments this week acknowledging the weak July employment report and the extreme uncertainty that is weighing on the economy.
- The Administration plans to appoint a temporary governor to the Fed to fill Adriana Kugler’s suddenly vacant seat.
- The ISM Services Prices Paid for July show that inflation pressures in the services sector are intensifying, which could portent upside risks to CPI in the coming months.
- The trade deficit shrank more than expected in June, as imports fell 3.7%. Imports have fallen three months in a row in reaction to tariffs imposed in April. Most import categories were down in June, but consumer goods, falling 12.7%, were the weakest by far.
- The Bureau of Labor Statistics Commissioner Erika McEntarfer was fired after the weak jobs report.
Our take: Friday’s weak employment report is not a big surprise in light of weak 1H GDP and lingering trade uncertainty. As we get through corporate earnings season, for most tariff-exposed or consumer-facing companies that don’t operate in AI-adjacent industries, weakness is apparent, and margins are under pressure. As we have been expecting, as tariff impacts eventually roll through the inventory / sales cycle and the full margin impact is appreciated, companies will have to make some difficult decisions to restore margins. Low-hanging fruit like cutting travel & entertainment or advertising will be the first move, but eventually labor costs, which typically represent a large component of company cost structures, will have to be addressed as well, and this is when the labor market could really start to deteriorate. Labor market weakness would be the quickest catalyst for the Fed to cut rates, and September is very much in play at this point, recognizing that there is ample economic data to come between now and September 17th.
Corporate Bond Market Commentary
- IG spreads widened 4bp to +82bp and total returns were +0.86%.
- IG fund flows were +$5.3 billion
- The new-issue IG supply was $11.2 billion. Book coverage was 4.1x, NICs were -0.3bp, attrition was 30% and final pricing tightened by 34bp on average. The current week is already over $40 billion of issuance.
- HY spreads widened 29bp to +313bp and total returns were -0.20% (BBs -0.08%, Bs -0.27%, CCCs -0.59%)
- HY fund flows were +$600 million.
- New-issue HY supply was $9 billion.
Our take: The weakness in credit markets on the back of mixed earnings and the weak employment report were short-lived, as risk-on behavior returned this week. Single-name dispersion has increased as winners and losers become more apparent through earnings reports and outlooks that have a bit more clarity on tariff policy. This volatility offers fertile ground for trading around existing positions and finding new ones at more attractive entry points. In addition, the new issue market remains wide-open, which provides both capital market-driven catalysts for existing positions and the opportunity to participate in and trade around new issues to generate incremental returns. These are all more attractive ways to play the markets right now as overall valuations on a spread basis are tight.
Municipal Bond Market Commentary
- The municipal bond index returned +0.77% last week, the best weekly performance since mid-April.
- This week’s new issue calendar totals $17 billion.
- Year to date new issue supply is $343 billion, up 23% versus 2024.
- Ratios were +1, unchanged, unchanged, and -1 at 1, 5, 10, and 30 years respectively, to end the week at 59%, 65%, 75%, and 95%.
- Fund flows were +$971 million.
Our take: Last week’s strong performance was not a surprise given favorable supply / demand technicals. Longer duration high grade 5% coupon municipal bonds remain attractive; ratios hovering around 100% should continue to attract some crossover buying interest, at a time when supply and demand should remain constructive. There has been strong demand for the very robust primary calendar, and consistently strong municipal fund inflows (positive in 13 of the last 14 weeks) totaling $23 billion YTD. If interest rates were to trend lower due to a slowing labor market and expectations for Fed rate cuts, that would add additional support to the market.
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Investors should consider a fund’s investment objectives, risks, charges and expenses carefully before investing. The prospectus contains this and other information about a fund. To obtain a prospectus, visit www.sheltoncap.com/ or call (800) 955-9988. A prospectus should be read carefully before investing.
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