Economic Commentary
- The administration moved to fire Fed governor Lisa Cook for cause, following allegations of mortgage fraud.
- Jerome Powell’s speech at the Fed’s Jackson Hole Symposium leaned a bit dovish, citing that ‘risks to inflation are tilted to the upside, and risks to employment to the downside’, putting the Fed’s dual mandate in conflict. However, it leaned more towards the employment side of the mandate by mentioning that ‘with policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance’. Markets interpreted this comment as opening the door to a potential cut in September.
- Initial jobless claims were 229k, down slightly from 234k last week, and continuing claims were 1,954k, down from a revised 1,961k last week.
- S&P manufacturing PMI was 53.3, up from 49.8 last month, the services PMI was 55.4, down from 55.7 last month, and the composite was 55.4, up slightly from 55.1 last month.
- Durable goods orders excluding defense and transportation were up 1.1%, stronger than expected and an improvement from -0.6% last month.
- The Conference Board consumer confidence reading was 97.4, down slightly from the revised 98.7 in July.
- Q2 GDP was revised up modestly to +3.3% from +3.0%. Personal consumption was unchanged at +1.6%.
- The core PCE price index was in line with expectations at +2.5%.
Our take: Next week’s employment, CPI, and PPI reports will be the last crucial data the Fed will get before their September meeting. Given there are currently 11 voters until the Senate approves someone for the vacancy, only 6 votes are required for a cut, and based on public comments recently, that threshold seems achievable. However, extrapolating any further cuts beyond 25bp in September is not yet justified by the data, and would require a deterioration in the labor market or a further change in the composition of voters. As of writing, 2.16 cuts are priced in for this year, and another 3+ cuts for next year. If further rate cuts occur due to labor market weakness, we would expect to see wider credit spreads and pressure on risk assets. Alternatively, if policy direction is influenced by external political dynamics, a steeper yield curve could result. These potential outcomes highlight the importance of monitoring both economic fundamentals and the evolving policy environment.
Corporate Bond Market Commentary
- IG spreads were 2bp wider to +77bp and total returns were +0.36%.
- IG fund flows were +$1.8 billion.
- IG new issue supply was $26.6 billion across 22 deals, with NICs 1.68bp, order books 3.74x covered, attrition 20.6%, and deals tightened 28bp on average from IPT to final pricing. BofA syndicate is calling for $60 billion of supply next week.
- HY spreads were unchanged at +288bp and total returns were +0.29% (BBs +0.31%, Bs +0.25%, CCCs +0.35%).
- HY fund flows were -$903 million, the first outflow in four months.
- HY had no new issues last week, and none expected this week. The new issue market should resume in earnest after Labor Day.
Our take: As expected, corporate credit markets were quiet this week. Earnings season has largely wrapped-up except for a handful of private reporting companies and retailers on their 1-month delayed reporting cadence. With spreads at tight levels, and new issuance expected to resume in earnest after the holiday weekend, we think investors will take a bit of a new look at markets and be less than enthused about return opportunities, which could provide opportunities to add bonds at cheaper levels. We also expect the recent trend of ‘haves’ and ‘have-nots’ to continue, with some companies disappointing markets and having blow-ups, while many companies prove resilient and perform well.
Municipal Bond Market Commentary
- Municipal bond yields were -6bp, -4bp, -1bp and +1bp and ratios are now 59%, 63%, 76% and 94% at 2, 5, 10 and 30 years.
- The AA muni / corporate ratio sits at 58%, 61%, 71%, and 88% respectively. At the long end, these ratios are attractive relative to historical averages.
- Fund flows were +$2.3 billion, with $2.2 billion coming into ETFs.
- This week’s supply is expected to be only $5.9 billion in the late summer doldrums.
- Municipal bond investors will only receive $25 billion of principal payments in September, down 42% from August, and $9 billion of interest payments. Net supply is expected to be positive over the last four months of the year, peaking in October at $42 billion.
Our take: Jerome Powell’s indication that a cut in September was a higher probability should help municipal bond fund flows. Long-duration municipals look better on a relative value basis, especially when compared to long-dated corporate bonds. These fundamental factors could help mitigate or offset the headwinds from market technicals of positive net supply over the coming months.
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