Economic Commentary
- The ISM Manufacturing Index rose from 48.0 to 48.7 in August, just missing the consensus estimate of 49.0. The miss was primarily due to a weaker-than-expected rise in the employment component, which rose only 0.4 to 43.8. That miss was somewhat offset by a surge in new orders, which pushed into expansionary territory at 51.4, the first expansionary reading since January of this year.
- Core PCE rose +0.27% and the annual pace increased from +2.8% to +2.9%, the highest since February.
- ISM manufacturing of 48.7 was below the 49.0 estimate and prices paid decreased from 64.8 last month to 63.7 this month.
- Durable goods orders declined 2.8%; excluding transportation they increased 1.0%.
- In the JOLTS survey, job openings declined from a revised 7.357 million to 7.181 million, and layoffs rose from 1.796 million to 1.808 million. The ratio of job openings per unemployed fell below 1x for the first time since spring 2021.
- Long-term bond yields were rising around the world early in the week, driven by Japan, the UK, and France as inflation pressure and concerns around fiscal policy to support defense spending and social welfare is pressuring budget deficits.
- The ADP employment change of +54k was below expectations of 68k and down from the slightly revised 106k last month.
Our take: All eyes are focused on the labor market for signs that it is cooling at a rate that would justify rate cuts. Many observers have characterized it as cooler but in balance, as new jobs aren’t being added, but layoffs have also not accelerated. Complicating the analysis of the labor market is changes in labor force participation that may be associated with recent immigration policy shifts.We think that the full impact of tariffs has not yet been felt by companies, with many signaling in ISM and Beige Book surveys that the full brunt is expected by October or later in Q4. Therefore, companies do not yet have a proper assessment as to where their costs will end up, and how their customers will tolerate potential price increases. Employers appear to be delaying major staffing decisions as they await greater clarity on how rising input costs and potential price adjustments may affect customer demand. For now, hiring has slowed, but widespread layoffs have not materialized. Should termination activity increase meaningfully, it could signal a more pronounced shift in labor market conditions that could support more rate cuts.
Corporate Bond Market Commentary
- IG spreads widened 3bp to +80bp and total returns were -0.21%.
- New issuance in IG was only $2.9 billion. Books were 3.2x covered, NICs were 0.3bp, attrition was 20% and deals were tightened 29bp from IPT to final pricing.
- IG fund flows were +$1.775 billion.
- HY spreads were 6bp tighter to +282bp and total returns were +0.42% (BBs +0.28%, Bs +0.50%, CCCs +0.95%).
- HY fund flows were -$975 million, the second consecutive weekly outflow.
- There was no HY issuance last week.
Our take: The IG market came roaring back to life this week with a tsunami of new issuance, as expected. Despite the heavy supply, price concessions were scarce, and value was hard to find. The HY market slowly increased but is now picking up speed. The initial HY deals were priced on the screws, with little value to be had, but as volume increases and the borrower type starts to vary more, we expect to find more interesting and compelling deals to participate in. Several days of small outflows in HY have seemed to stabilize, but September has many more trading days left with plenty of time for surprises and volatility. Maintaining some dry powder for interesting new issues and for price volatility in secondary markets makes sense.
Municipal Bond Market Commentary
- Muni yields were -1, -1, -2, and -2 and ratios were 0, +1%, 0, and -1% at 1, 5, 10 and 30 years respectively.
- This week’s calendar is expected to be $10.3 billion after last week’s $8.4 billion.
- Fund flows were +$1.157 billion, on top of the $21 billion of principal and interest payments made on September 1st.
Our take: Short-duration municipals will likely underperform US Treasuries if the Fed cuts rates, given their expensive relative value starting point, while longer-dated municipals could benefit from demand by institutions such as banks, hedge funds, and insurance companies. Recent stories about the major fiscal problems confronting the Philadelphia public transit system could be a canary in the coal mine for certain municipal credits. Combined with concerns for smaller healthcare systems arising from cuts to reimbursements and subsidies, investors should reassess the creditworthiness of their portfolios.
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