Economic Commentary
- The Federal Reserve cut its benchmark interest rate by a quarter point, as widely expected. There were 2 dissents, in opposite directions. Stephen Miran dissented in favor of a half-point cut, while Jeff Schmid dissented in favor of no cut at all this meeting. Chairman Powell characterized another rate cut in December as ‘far from a foregone conclusion’. The lack of available economic data during the shutdown adds to the confusion and might be enough of a reason to slow down.
- CPI rose +0.310% in September, and the Core CPI rose +0.227%, both a tenth less than expected, even with a rise in energy prices adding a tenth to the headline rise. Year over year CPI rose 3.023% and Core rose +3.026%, the first drop in core since May. Owners’ equivalent rent only rose +0.1%, the smallest increase since January 2021.
- The Chicago Fed published their real-time unemployment rate forecast of 4.35% in October, up slightly from 4.34% in September and compared to the last official BLS report of 4.3% for August as published in early September. According to a White House statement last week, there will likely be no October CPI release at all given the government shutdown.
- ADP launched a new weekly private payrolls data series, showing a 14,250 average weekly increase over the 4 weeks ended October 11, or 57,000 total.
- The S&P US PMI data came in at 52.2 for manufacturing, 55.2 for services, and 54.8 composite. All were higher than last month and also higher than expectations.
- The Conference Board consumer confidence survey was 94.6, up from the revised 95.6 last month. The present situation reading was better, while expectations were actually lower.
Our take: Markets came into the Fed meeting pricing-in 92.3% probability of another cut in December, but after today’s post-meeting press conference, that probability is down to 64.4% and likely headed lower towards a 50/50 coin toss. Risk markets sold off just a bit, and US Treasury rates moved higher. He did concede that ‘non-tariff inflation’ is improving and is not too far above their 2% goal, as housing-related inflation is finally moderating. Therefore, this may be more of a pause on account of less available information during the government shutdown, rather than a final call on further rate cuts.
Corporate Bond Market Commentary
- IG spreads tightened -3bp to +77bp and total returns were +0.29%.
- Investment grade fund flows were +$548 million.
- New issue supply was only $10.3 billion across 10 issuers, the lowest weekly volume since the late August doldrums. October supply was only $53 billion through the end of last week, tracking well below the $90 billion estimates, until the first two days of this week priced over $37 billion. NICs were 4bp, order books were 4.7x covered, attrition was 22% and deals were tightened 27bp on average from initial price talk to final pricing.
- HY spreads tightened -16bp and total returns were +0.43% (BBs +0.50%, Bs +0.40%, CCCs +0.19%).
- High yield fund flows were -$515 million.
- New issuance was only $2.8 billion across three deals – Albertsons, Versant Media, and Avation Group.
- 2025 has seen $32 billion of rising stars and $42 billion of fallen angels year to date. This is the first time in four years that fallen angels are on track to outpace rising stars, after 2024 saw the lowest volume of fallen angels since 1997.
Our take: Earnings season so far has been tracking favorably, yet the lower credit quality cohort of companies has not yet begun reporting their earnings as of yet. Many sectors have reported good results (large banks, technology, hospitals, auto OEMs) while others are not (chemicals, consumer staples, apparel). Many are explaining that the largest impact from tariffs is just now beginning to hit, with worse results ahead of them rather than behind. This disparity between winners and losers should only increase in the months ahead, a credit picker’s dream, in contrast to the homogenous melt-up across most bonds over the last several months.
Municipal Bond Market Commentary
- The municipal bond index returned +0.16% last week.
- Muni yields were +9bp, +10bp, -7bp, and -4bp and ratios were +2%, +2%, -2%, and -1% to 69%, 65%, 67% and 88% at 1, 5, 10, and 30 years respectively.
- Fund flows were +$1.695 billion, with $1.436 billion into ETFs and $259 million into mutual funds.
- Last week $18 billion of new issue supply priced, of which $15 billion was tax-exempt.
- This week’s new issue calendar totals just $5.9 billion, of which $5.5 billion is tax-exempt.
- Next Monday investors should receive $21.8 billion of principal and interest payments for November 1st to be reinvested back into the market.
Our take: With the combination of lower than expected new issue supply for October and the pickup in redemption flows, the technical outlook for the muni market is improving, and it should take another leg higher from mid-November when new issue volume trends lower into year-end.
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