Economic Commentary
- The CPI report originally scheduled for this week is now expected to be released on 10/24 due to the government shutdown. Fed officials will therefore head into their October meeting with the latest inflation data in hand, but having seen it only after their pre-meeting communications blackout has begun.
- Jerome Powell spoke at the NABE annual meeting; his comments essentially confirmed that the FOMC will likely cut rates again at its next meeting, and that the Fed will likely end its balance sheet runoff ‘in coming months’, in line with market expectations and the primary dealers survey.
- Global recession concerns fell to their lowest level since February 2022, Bank of America’s October global fund manager survey shows. The survey also reveals the biggest six-month surge in growth optimism since October 2020. An eight-month high of 33% of investors surveyed expect a ‘no landing’ scenario, compared with 18% in September. Expectations of a ‘soft landing’ fell to a six-month low of 54%, down from 67% in September, and only 8% forecast a ‘hard landing’.
- The NFIB small business optimism reading was 98.8, down from 100.8 last month and below the 100.6 expectation.
Our take: The lack of available economic data makes predicting the near-term path of interest rates more challenging. In the absence of this information, markets are turning to alternative data sources and public comments from FOMC members and bank CEOs. Comments this week from bank CEOs assuaged fears of systemic issues in private credit and consumer credit, while comments from Fed governors suggest continued rate cuts over the coming months. Markets are now pricing in 95.7% probability of a cut at the late October meeting and 95.8% probability of another cut at the December meeting.
Corporate Bond Market Commentary
- Investment grade bond spreads widened 6bp to +81bp and total returns were +0.12%.
- IG fund flows were +$2.350 billion.
- IG new issuance was only $13.2 billion, reflecting a pullback from the very heavy September, and many potential issuers on the sidelines due to earnings blackouts and renewed macro volatility. New issue concessions were 2.3bp, book coverage eased to 3.6x, attrition rose slightly to 24%, and pricing tightened on average by 27bps from IPT to final pricing. This week’s estimated supply is $30 billion as big banks report earnings and then tap the market.
- HY spreads widened 38bp to +318bp and total returns were -0.80% (BBs -0.65%, Bs -0.92%, CCCs -1.23%).
- Fund flows were +$1.539 billion but turned decidedly negative on Thursday and Friday.
- HY new issue supply was $5 billion with deals from Talen Energy, Danaos, Getty Images, Coty, and Cliffs.
Our take: We have mentioned in recent weeks that the Tricolor bankruptcy could be a harbinger of future credit stress, particularly in the subprime consumer space. The escalating losses from First Brands Group at the end of last week is increasing the frequency of people using this same ‘canary in the coal mine’ expression. The stress around this particular fraud-induced default caused Jefferies to go so far as to put out a release on Sunday trying to calm market fears as to their exposure and solvency. This can cause a re-calibration of risk, including a reassessment of the prudency of private credit. Several leveraged loan deals were pulled from syndication as a reflection of this risk-off reaction. Although markets rebounded over the last few days, when episodes of credit stress begin, they rarely end so quickly.
Municipal Bond Market Commentary
- The municipal bond index total return was +0.37% on the back of lower UST rates.
- Yields were +5bp, -1bp, -5bp and -5bp and ratios were +2%, +1%, unchanged, and +1% to 65%, 62%, 70%, and 90% at 1, 5, 10, and 30 years respectively.
- Fund flows were +$1.218 billion with $104 million into mutual funds and $1.114 billion into ETFs.
- Last week’s new issue calendar totaled $15.9 billion, of which $15 billion was tax-exempt. This week’s calendar totals $13 billion, of which $10.5 billion is tax-exempt and $2.1 billion is taxable, and next week’s calendar already has five deals of more than $1 billion each.
Our take: With rate cuts expected in October and December, combined with positive funds flows, generally strong municipal credit quality, and moderating new issue supply through the balance of the year, municipal bonds appear set-up for favorable performance.
Important Information
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