Economic Commentary
- Consumers’ expectations of long-run inflation held steady in August, while gloom about the labor market grew, according to a survey by the New York Fed. Over the next year, consumers forecast that prices will rise by 3.2%, up slightly from the expectation in July. But expectations for inflation in three years and five years held steady at 3% and 2.9%, respectively. Meanwhile, the expected probability of finding a new job after a hypothetical job loss fell to 44.9%, the lowest reading since the survey began 12 years ago.
- Nonfarm payrolls increased by only 22,000 in August, well below expectations of 75,000, and revisions to prior months added to the downbeat tone of the report. The average duration of unemployment also rose. Torsten Slok at Apollo analyzed the figures and found that tariff-affected sectors were bearing much of the brunt of the weakness.
- The BLS revised payrolls -911,000 lower than initially reported for the year ended in March 2025 and lower than expected.
- August PPI fell -0.1%, below the +0.3% estimate, and the core PPI rose +0.3%, in line with expectations. Three quarters of the decrease for final demand services prices was due to a 3.9% decrease in margins for machinery and vehicle wholesaling, suggesting that businesses are absorbing tariff costs.
- Initial jobless claims rose to 263,000 from 236,000 last week – the highest level in four years.
- Real hourly earnings rose +0.7% and real weekly earnings only +0.4%, down from +1.2% and +1.1% respectively, in another sign that the labor market is cooling.
- CPI increased +0.4%, above consensus of +0.3%, but the year-over-year figure of +2.9% was in line with expectations. Core CPI rose +0.3% for the month and +3.1% year-over-year, both in line with expectations.
Our take: Almost all of the labor market data points over the last several weeks show varying degrees of cooling. A softer labor market would offer support for the Fed to lower interest rates. A 25bp cut at next week’s September meeting is now an almost foregone conclusion, but 50bp is still unlikely. In the coming months, if PPI and CPI were to offer some evidence that tariffs were not likely to cause significant non-transitory inflation, it could give the Fed more flexibility to consider further rate cuts. As of writing, 2.91 cuts are priced in for 2025 and another 3.06 cuts in 2026.
Corporate Bond Market Commentary
- IG spreads were 1bp tighter to +79bp and total returns were +1.10%.
- IG new issue volume was $67.4 billion, well ahead of $55 billion estimates. Book coverage was 4.1x, NICs were 1.8bp, attrition rose to 26% and deals compressed by 27bp from IPT to final pricing.
- IG fund flows were +$1.948 billion.
- HY spreads were 1bp wider to +283bp and total returns were +0.35% (BBs +0.36%, Bs +0.32%, CCCs +0.37%).
- HY fund flows were $2 million.
- HY new issuance was $10 billion including deals from Sunoco, Cleveland-Cliffs, Level 3, and several homebuilders.
- Subprime auto lender Tricolor Holdings collapsed and filed for liquidation. Often times, this type of event can be a canary in the coal mine, signaling pressure on the lower cohort of consumer credit.
Our take: Bond returns are benefiting from the move lower in UST rates recently. So far, this is a ‘bad news is good news’ reaction, where the slowing labor market (bad news) is the impetus for future rate cuts (good news). However, if the labor market cooling turns into a freeze, then bad news should actually become bad news for risk assets, including bond spreads. Offsetting this type of reaction function would be if such a risk-off move would spur a rotation from riskier assets like equities into the perceived safety of bonds. We continue to believe that high quality fixed income would benefit from a move lower in rates. Picking lower-rated credits requires more discernment, and this is where skill and experience are crucial to pick winners and avoid landmines.
Municipal Bond Market Commentary
- The muni index generated returns of +0.94% last week.
- Yields were -4, -10, -13, and -15 at 1, 5, 10, and 30 years, putting ratios at 58%, 63%, 74%, and 93% respectively.
- This week’s new issue calendar is $10.0 billion, of which $6.5 billion is tax-exempt, $2.9 billion is subject to AMT and $355 million is taxable.
- Fund flows were +$1.193 billion, of which +$668 million was mutual funds and +$525 million was ETFs.
Our take: Lower UST rates are driving favorable performance for municipal bonds, despite the less-favorable technical conditions in September of lower principal and interest payments and rising new issue supply expectations. In the retail-dominated muni market, positive returns tend to beget more inflows and drive a virtuous cycle of good performance. The long end of the muni curve appears to offer the best relative value, for those investors who are comfortable taking on the duration.
Important Information
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.
It is possible to lose money by investing in a fund. Past performance does not guarantee future results. Any projections or other forward-looking statements regarding future events or performance of markets, companies, or otherwise are not necessarily indicative or differ from, actual events or results.
INVESTMENTS ARE NOT FDIC INSURED OR BANK GUARANTEED AND MAY LOSE VALUE.
