Economic Commentary
- Initial jobless claims declined from 218k to 191k, well below estimates of 220k. Continuing claims also moderated from 1943k to 1939k.
- ADP reported private sector net job cuts of 32k in November after a gain of 47k in October (revised from 42k). The drop reflected 120k job losses at small businesses with fewer than 50 employees. Medium and large firms added workers. November was the fourth month this year with net job losses reported by ADP. This time, job losses were an east coast phenomenon, suggesting they may reflect layoffs by contractors doing government work affected by the shutdown. The fact the layoffs were at small firms suggests they do not reflect the layoff announcements attracting attention in October, as those announcements were at large firms and are likely to hit in December or January given the 60-day Warn notice requirement.
- The ISM Manufacturing Index fell from 48.7 to 48.2 in November, missing the consensus estimate of 49.0 by almost a full point. The miss was primarily due to weaker-than-expected employment and new orders components, both of which fell by two points. The prices paid component rose half a point to 58.5, the first increase in four months.
- Bank of Japan Governor Ueda made comments signaling a rising likelihood of another rate hike, moving market expectations for tightening this month from a coin toss to a near-certainty. Rising yields in Japan have pulled long-term UST rates higher in recent days.
- The Atlanta Fed Nowcast model is showing that the U.S. economy has accelerated to a +3.9% annualized pace. Meanwhile, the New York Fed’s model is +2.3%, and St. Louis is +0.5%. The information provided by the 48.2 ISM manufacturing number has been more or less consistent with an economy expanding at a little better than a +1.0% annual rate.
- Market rumors suggest that Kevin Hassett is the front-runner to be the Administration’s choice to be the next Fed Chairman.
- ISM services prices paid fell significantly from 70.0 to 65.4, the lowest since April. This data set is a solid leading indicator for CPI and suggests the recent run-up in prices paid has inflected lower again. The new orders component fell from 56.2 to 52.9.
Our take: Now that the Fed is in its pre-meeting quiet period, and there was no pushback against bond markets swinging around to near certainty of a cut next week, the probability of a 25bp cut at next week’s meeting is 91.4%. The drama will be how hawkish the cut is – how high is the bar for future additional cuts, and is the vote 7-5 or can Powell elicit consensus and minimize dissents? Recent economic data has been mixed and confusing. As the backlog of data missed during the government shutdown continues to catch-up over the coming weeks, hopefully we will get more clarity on the pace of economic activity heading into 2026.
Corporate Bond Market Commentary
- IG spreads tightened 4bp to +82bp and total returns were +0.62%.
- IG new issuance was only $3 billion across 2 deals – Roche and Duke Energy Florida. NICs were -0.4bp, order books were 5x oversubscribed, attrition was 22%, and the deals were tightened 28bp from IPT to final pricing.
- IG fund flows were -$874 million.
- HY spreads tightened 24bp to +295bp and total returns were +0.72% (BBs +0.71%, Bs +0.89%, CCCs +0.25%).
- One new HY deal priced last week – $1.5 billion for United Rentals.
- HY inflows were +$706 million. Leveraged loans saw -$59 million of outflows.
Our take: Last week was quiet but firm in the holiday-shortened Thanksgiving week. New issuance picked up after the holiday weekend for the final 3-week sprint before things shut down for the holidays. Markets will take their cues from next week’s Fed meeting and the backlog of economic data to be released over the coming weeks for direction into year-end.
Municipal Bond Market Commentary
- The muni index was up +0.17% last week.
- Muni yields were -1, -0.5, -0.5, -1, and ratios were unchanged, unchanged, +1% and +1% to 69%, 66%, 68%, and 87% at 1, 5, 10, and 30 years respectively.
- Fund flows were +$1.065 billion, with $1.29 billion into ETFs and $225 million out of mutual funds.
- Investors received $30 billion of principal and interest payments on December 1st.
- This week’s new issue calendar is $15.7 billion. Last week, only $3.5 billion was priced.
Our take: Muni markets weathered the elevated supply in November and now sail into large reinvestment dollars in December and January. Supply should remain robust for two more weeks before shutting down for the holidays, allowing some grind into year-end. Next year’s supply picture looks to be less constructive, but further Fed rate hikes and the usual investor inflows that would follow can balance the technical picture and generate attractive returns for munis in 2026.
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