Economic Commentary
- On Friday, New York Fed President John Williams said that he still saw ‘room for a further adjustment in the near-term… to move the stance of policy closer to the range of neutral’. Since he is a close ally of Jerome Powell, the market placed heavy weight on these comments as tipping the scales of a close vote in December in favor of a cut.
- San Francisco Fed President Mary Daly, also a Powell ally but not a voter, said Monday that she supports cutting rates in December because she sees a sudden deterioration in the job market as both more likely and harder to manage than an inflation flare-up.
- Retail sales increased +0.2%, down from the +0.6% gain in September and below expectations of +0.4%. Control group sales declined -0.1%, below expectations of +0.3%. This marks four consecutive months of declining retail sales.
- PPI rose +0.3%, in line with expectations. Year over year PPI excluding food and energy was up +2.6%, down from +2.9%, but still elevated.
- Consumer confidence fell 6.8 points from 94.6 to 88.7, the largest fall in seven months. Expectations declined to the lowest level since April and present conditions slumped to a more than one-year low at 126.9.
- Jobless claims decreased by 6k to 216k, below expectations of 225k and the lowest level since mid-April. Continuing claims edged up to 1.96 million, slightly below the 1.963 million estimate and down from a revised 1.953 million last week.
- Durable goods orders for September rose 0.5%, down from a revised 3.0% in August, but in line with expectations.
Our take: After the last FOMC meeting when Jerome Powell cautioned that December would be a tough call, markets reduced their expectations accordingly. It now seems as if Powell was letting fellow members air their opinions before trying to coalesce a view and having both his ally John Williams and his favored journalist Nick Timiraos deliver the message. Using recent public comments, the tally seems to be 7-5 in favor of a cut, and the market is now pricing in an 81% probability of a cut in December.
Corporate Bond Market Commentary
- IG spreads were 3bp wider last week to +86bp and total returns were +0.39%.
- IG fund flows were +$807 million.
- IG new issuance was $47 billion last week. Order books were 4.1x oversubscribed, NICs were 3.6bp, attrition was 27% and deals tightened 28bp from initial price talk to final pricing.
- HY spreads were 12bp wider to +319bp and total returns were +0.01% (BBs +0.04%, Bs -0.01%, CCCs -0.03%).
- Fund flows were -$333 million.
- New issue supply was $6 billion including deals from Cipher Compute, Ardagh Metal Packaging, Sabre, Molina Healthcare and Genmab.
Our take: The overall modest returns in corporate bond markets belied the intra-week volatility driven by interest rate gyrations and AI-related credit concerns, the latter of which, has also induced single-name stock price volatility. Markets are becoming increasingly worried about a potentially large increase in net supply next year, driven by a pickup in M&A activity and a surge in AI-related funding needs. A widening of spreads on account of deteriorating technicals should provide increasing opportunities for new issue concessions and trading opportunities in the IG bond space next year.
Municipal Bond Market Commentary
- The municipal bond index returned -0.09% last week.
- Ratios were +1, +2, +2, and +1 to 70%, 67%, 67%, and 87% at 1, 5, 10, and 30 years respectively.
- Fund flows were -$19 million, with $311 million into ETFs and $330 million out of mutual funds. However, if the outflows that were driven by a fund acquisition early last month are excluded, JP Morgan strategists estimate inflows would have continued with $130 million into mutual funds.
- New issue supply was $11 billion last week. This week’s new issue calendar is only $1.154 billion.
Our take: With this week’s light new issue calendar and only a few more weeks of potential deal flow left in the year, combined with reinvestment dollars coming into the market in December, the muni market is set up for a steady performance into year end.
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