Economic Commentary
- CPI inflation of +0.197% was below the +0.3% consensus, while core CPI was in line with expectations. The increases were more of an airline fares and medical care services story than tariffs.
- PPI came in much stronger than expected. Headline PPI rose 0.9%, up from 0% last month and the 0.2% expectation. Year over year the increase was 3.3%.
- Initial jobless claims were 224k, down from 227k last week. Continuing claims were 1953k, down from a revised 1968k last week.
- NFIB small business optimism rose from 98.6 to 100.3.
- The administration nominated CEA Chair Stephen Miran as a temporary Fed Governor to fill Adriana Kugler’s vacancy.
Our take: Today’s PPI data has some concerning elements. Strength in margins suggests that companies may in fact be able to raise prices to consumers rather than absorbing them. If this is the case, the labor market might hold up better, but inflation might be more of a concern. Given all of the momentum since the tame CPI report and the very weak jobs report pushed rate cut probabilities over 90% for September and for 2.5 cuts by year end, markets may have gotten ahead of themselves. In order for the Fed to move faster or deeper on cuts, the labor market will need to show further signs of weakness, and therefore much will be riding on the August employment report due in early September. Rate cut probabilities are now 93% for September and for 2.28 cuts by year end, down from 107% for September and 2.55 cuts by year-end as of yesterday’s close. As is typical for inflection points in the economy, data will be a little more volatile, unpredictable, and subject to revisions, so overly relying on any one data release would not be advisable.
Corporate Bond Market Commentary
- IG spreads tightened 2bp to +80bp and total returns were -0.11%.
- IG fund flows +$11.6 billion.
- IG new issuance was $40.425 billion, the busiest since the week of May 16th and well above expectations of $25-30 billion. NICs were 4.1bp, book coverage was 4.3x, attrition was 22% and deals tightened 27bp on average from IPT.
- HY spreads tightened 19bp to +294bp and total returns were +0.41% (BBs +0.42%, Bs +0.40%, CCCs +0.43%).
- HY fund flows were +$2.4 billion
- HY new Issuance was $14.8 billion, the largest week since 2021, led by deals from PetSmart, WR Grace, Ball, Level 3, First Quantum Minerals, Snap, Match Group and others.
Our take: We are now most of the way through earnings season, and the story seems to be that financials and AI-adjacent companies are doing well, while basic materials, industrials, and many consumer-facing companies are experiencing varying degrees of headwinds. Given that the rules of the road are still evolving, and then it still takes many months for all of this to work its way through the system, a clearer picture will take another 1-2 quarters. The market can’t figure out if it wants lower rates, which would likely be driven by a deteriorating labor market, or higher rates – if driven by growth rather than inflation. The bond market is about to enter the second half of August doldrums, so the new issue calendar will be light or nonexistent, and secondary market liquidity will be muted. We will take advantage of any opportunities that present themselves to trade bonds when others are on vacation and prepare for the post-Labor Day onslaught of activity.
Municipal Bond Market Commentary
- The muni index returned +0.28% last week.
- Issuance was $21.7 billion, the biggest weekly total since December 2017. This week’s calendar totals $9.2 billion.
- Issuers will be returning $9.6 billion of maturing and called bond principal on Friday 8/15.
- Fund flows were +$1.722 billion.
- Ratios are 57, 63, 74, and 94, a change of -2, -2, -1, and -1 at 1, 5, 10, and 30 years respectively.
Our take: The market absorbed the largest supply week in over 7 years, aided by solid fund flows and ample principal and interest payments. Going forward, the technicals may not be quite as supportive, so performance will depend on stable or lower UST rates and consistent fund flows. Long dated municipals are still attractive at ratios in the mid-90s, so methodically adding some of them over the coming weeks in anticipation of Fed rate cuts this fall makes sense.
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