Economic Commentary
- The federal government shut down at 12:01am on October 1st. This government shutdown is different, however, because there is no accompanying debt-ceiling crisis, so there is no default risk on US Treasuries.
- JOLTS job openings rose from 7,208k last month to 7,227k in August. The rate of quits and layoffs rate both remained relatively constant. The theme of a low hiring / low firing economy continues, for now. At a minimum, the low turnover is keeping a lid on wages.
- ADP private payrolls declined by 32K in September and last month’s 54K gain was revised down to -3K.
- The Atlanta Fed GDPNow estimate for Q3 GDP is currently +3.84%.
- The PCE deflator rose +0.3% in August, and the core was up +0.2%. The year over year rate is +2.9%. Goods price inflation bottomed out around a year ago and has been slowly creeping higher.
- Personal income rose +0.4% and consumption rose +0.6%. The savings rate, except for a brief dip in December, is the lowest since the end of 2022. This may not be maintainable. Nominal and real wages are not keeping up with inflation, yet consumer spending has been resilient. While upper income consumers are powered by home equity and stock market wealth effects, eventually there could be some reversion in overall consumer spending.
- The administration has introduced additional tariffs over the last week on furniture, pharmaceuticals, heavy duty trucks, kitchen cabinets, softwood timber and lumber, and others, breaking the recent calm and introducing some further uncertainty into markets.
Our take: While the government shutdown may not have major impacts on the economy right away, one immediate effect is that there would be a pause on a lot of the economic data that markets, and the Fed, rely on. In the absence of some of this data, investors will have to rely on those data releases that are unaffected; however, it is notable that the ADP private payrolls report witnessed their biggest decline in 2 ½ years. Meanwhile, the Supreme Court ruled that Fed Governor Lisa Cook can remain in the job until a hearing is held in January, which may slow some of the momentum on pushing on the Fed for lower rates. Based on dot plots from the September meeting, and recent speeches by Fed governors, the impetus for aggressive rate cuts does not appear to be strong. If there are fewer economic data releases during a shutdown, then there would also be fewer opportunities to see evidence that the labor market is slowing markedly, which is what many FOMC voters say they would need to see in order to advocate for faster or deeper rate cuts.
Corporate Bond Market Commentary
- IG spreads were 1bp wider to +75bp and total returns were -0.37%.
- IG fund flows were +$1.83 billion.
- IG new issue supply was $54.9 billion across 26 issuers, well ahead of the $30 billion forecast. The monthly total of $194.4 billion marks the busiest month of the year. NICs were 4.1bp, books were 4.5x covered, attrition was 20%, and pricing tightened on average 29bp from IPT to final pricing.
- HY spreads were 3bp wider to +275bp and total returns were -0.24% (BBs -0.26%, Bs -0.21%, CCCs -0.25%).
- HY fund flows were -$366 million.
- HY new issue supply was $18 billion including deals from Solenis, Windstream, Clean Harbors, Lamar, Starwood, Weatherford, NRG, Mineral Resources, and Northern Oil & Gas. The September total of ~ $51 billion is the fifth busiest month on record and the most since March 2021.
Our take: The key word takeaway for recent corporate bond markets is indigestion. Heavy new issue supply all month long finally bumped up against modestly less supportive fund flows and other technicals, leading to a bit of spread widening and modest negative returns. Near-term performance should be aided by earnings blackouts that kicked in, which will somewhat limit new issuance over the next couple of weeks. Risk markets may also take some cues from the potential duration of the government shutdown. A brief closure shouldn’t have much of an effect, but a longer one could start to have implications for individual companies or industries and the market overall. While recent economic activity and consumer spending has seemed healthy, investors will be parsing upcoming Q3 earnings reports and management commentaries for signs of consumer fatigue and assessments of price elasticity as companies grapple with pricing their products as they are now replenishing older pre-tariff inventory with new materials and merchandise priced at the current higher rates.
Municipal Bond Market Commentary
- The municipal bond index was down -0.36% last week, breaking a streak of 9 weeks of positive returns.
- Muni yields rose 23bp, 18bp, 7bp and 5bp and ratios increased 5%, 3%, 1%, and 1% to 62%, 61%, 69% and 89% at 1, 5, 10 and 30 years respectively.
- New issuance was a heavy $18.2 billion. This week’s calendar is $6.6 billion, and in the first half of October reinvestment dollars should be $26.8 billion, offering a reprieve and technical underpinning to the market.
- Fund flows turned negative for the first time in 9 weeks, with $300 million out of ETFs and $47 million into mutual funds, for a net outflow of -$253 million.
- If the Federal Government moves to permanently cut the government workforce, and these layoffs withstand legal challenges, they could have an impact on municipal credits in geographies that are particularly reliant on federal employment.
Our take: The municipal bond market is more technical given the large retail ownership base. Last week is a classic example, where heavy new issue volume coincided with light reinvestment dollars and modest negative fund flows to produce a mildly negative total return. We knew the heavy supply was coming, and also that September reinvestment dollars are seasonally lower. However, the good news is that this week’s supply calendar is lighter, and reinvestment dollars on October 1 are stronger, so the muni market can catch its breath. As we suggested last week, investors who are looking to add exposure to either individual municipal bonds or funds and ETFs should be prepared for these episodes of weakness to do just that.
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