Economic Commentary
- Challenger, Gray & Christmas layoff announcements were 153,074, almost tripling from September and the highest October level in more than two decades. In addition, the Intuit small-business employment growth figures for September showed a net decline, as has been the case in three of the past four months, and the Q4 Manpower survey showed net hiring intentions faltering to 28 from 30 in Q3 and 34 in Q2, now at a four-and-a-half-year low.
- Several Fed governors have spoken since last week’s FOMC meeting. While on the surface many of the comments suggest a hawkish tone and hesitancy to cut rates again in December, when parsing and tallying for those speakers who are voters, the tally actually looks more balanced.
- Ward’s Auto reported October vehicle sales slowed from a 16.39-million-unit annual pace in September to a 15.32 million pace in October. A drop was widely expected because an electric vehicle tax subsidy expired on October 1. Nevertheless, the drop at the start of Q4 will make it difficult for consumption to continue, driving GDP growth close to 4% through the last quarter of the year.
- The October ISM manufacturing index fell from 49.1 to 48.7, despite new orders recovering a tad from 48.9 to 49.4 and the employment index recovering a bit from 45.3 to 46.0. Weaknesses in manufacturing were a production issue in October, with that index dropping from 51.0 to 48.2. The one bright light was a fourth consecutive drop in the prices-paid index, from 61.9 to 58.0.
- McDonald’s said that traffic from lower-income customers fell nearly double digits, while higher-income diners trading down drove high single digit traffic increases in that cohort.
- The ISM Services Index rose from 50.0 to 52.4 in October, beating economists’ median estimate of 50.8. The better-than-expected print was due to a 56.2 print for new orders, the best since October 2024. Meanwhile, employment posted another month in contraction but rose a full point to 48.2. Services prices-paid rose in October from 69.4 to 70.0 – higher than the 68.0 consensus.
- ADP reported 42k private-sector jobs created in October, slightly more than the 30k median in the Bloomberg Economics poll and the biggest job gain reported by ADP since 104k added to payrolls in July. The October increase follows declines in August and September. Small companies with fewer than 50 employees continued to shed jobs in October, with payrolls down 10k.
Our take: Markets and the Fed are flying somewhat blind without the benefit of official economic statistics, but alternative measures of the labor market may be flashing warning signs. The 153k layoff announcements from Challenger, Gray & Christmas – almost tripling from September and the highest October level in over two decades – may portend some future labor market weakness. Whether or not the FOMC has enough visibility or conviction to cut in December, in the broader scheme the case for eventual further rate cuts seems intact.
Corporate Bond Market Commentary
- IG spreads widened 3bp to +80bp and total returns were -0.76%.
- IG fund flows were +$1.881 billion.
- IG new issue supply was $78.9 billion across 25 issuers, the busiest week since September 2024, including $30 billion from Meta alone. This deluge is expected to continue, with $55 billion this week and $120 billion total for November. NICs were 3.6bps, books were 3.7x covered, attrition was 22% and tightening from initial talk to final pricing was 29bp.
- HY spreads widened 6bp to +294bp and total returns were -0.09% (BBs -0.09%, Bs -0.14%, CCCs +0.07%).
- HY fund flows were -$1.029 billion.
- HY new issue supply was $4 billion with deals from Kaiser Aluminum, White Cap, Bread Financial, Voltagrid, and Carter’s.
- Roughly $42 billion of corporate bonds have been downgraded this year from IG to HY. The share of the IG market now possessing a negative outlook by the rating agencies just hit a ten-year high, including the BBB/BBB- tranche.
- The Beignet/Meta data center debt transaction is interesting for many reasons. It is a reminder that AI is not just a key driver of equity markets, but it will have meaningful supply implications for HG credit markets as well. The scale of these financings is likely to be very large in coming quarters. Coming into October, META had just $29 billion of index debt and within just 2 weeks they’ve raised another $57 billion through the Beignet transaction and the regular META bond deal. Despite this, as of this writing, they are still an AA- rated company trading inside 100bp across most of their curve.
Our take: Single-name credit volatility is increasing, consistent with recent market trends. This earnings season is further revealing the haves and have-nots. Many companies in the industrial, chemicals, packaging, transportation, building products, and retail/consumer industries are disappointing investors, and their bonds are getting punished. This may start to open more contrarian bond investment opportunities, as some of the good companies in these industries may get painted with the same brush and/or markets may overreact to the downside given November is typically a risk averse month for high yield bond investors seeking to protect their annual performance.
Municipal Bond Market Commentary
- The municipal bond index returned -0.11% last week.
- Muni yields were +4, +4, +2, and +2 and ratios were -1%, -1%, -1%, and -1% to settle at 68%, 64%, 66%, and 87% at 1, 5, 10, and 30 years respectively.
- Fund flows were +$1.190 billion with $2.985 billion into ETFs and -$1.795 billion out of mutual funds, although some of this was noise from several Franklin mutual funds that converted to ETFs.
- This week’s new issue calendar is $10.8 billion, of which $9.8 billion is tax-exempt. Last week’s volume was $8 billion.
- Investors received $14.3 billion of principal payments and $7.5 billion of interest payments on November 1st.
- The recent New York mayoral election could present a tactical opportunity, as structural constraints on a mayor’s ability to enact sweeping changes to borrowing or spending limit some of the potential credit impact.
Our take: The recent backup in rates may cause a bit of a hiccup for municipal bonds if they persist for more than just a few days. Offsetting these rate pressures are the favorable technicals from reduced issuance forecasts and the strong November and December principal and interest reinvestment dollars. In particular, the steepening of the curve may cheapen longer duration municipals, which have become a bit rich over the last several weeks, potentially improving relative value for longer-duration municipals, particularly if outflow-driven selling pressures persist.
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