Economic Commentary
- The Fed cut rates 25bp as widely expected. The updated FOMC dot plots raised GDP for 2026 to 2.3%, held the unemployment forecast steady at 4.4%, and lowered the core PCE deflator to 2.5%.
- ·Q3 Employment Cost Index rose 0.8%, a tenth less than expected and the smallest increase since last year’s third quarter. In the absence of clear or reliable statistics on job creation and unemployment, actual labor costs are perhaps the best measure of supply and demand for workers, and moderating ECI suggests the labor market is cooling.
- September and October JOLTS job openings were much higher than expected, at 7.66m and 7.67m, respectively. The quits rate was also lower – it was 2.0% in September and 1.8% in October.
- ADP’s weekly employment pulse showed private employers added an average of 4,750 jobs per week during the four weeks ending November 22, not stellar but nevertheless the first positive print in five weeks.
- September consumption rose 0.3%, the same as the increase in PCE inflation, meaning real consumption was unchanged. In the quarter as a whole, real consumption rose at a 2.9% annual rate, and personal income rose 0.4%, the same as in August. Real income rose 0.1%.
- PCE inflation rose 0.3% headline and 0.2% core, as expected. Year-on-year core PCE inflation dropped from 2.9% to 2.8%, also as expected.
Our take: A lot of data will be released before the next Fed meeting on January 28th, including 3 months of payroll data and 2 months of CPI. Jerome Powell stated they believe that payroll data continues to be overstated by 60,000 per month, such that actual job creation is negative. If no new tariffs are implemented, inflation could start to moderate after Q1 2026. This could set the Fed up to cut a few more times in 1H 2026.
Corporate Bond Market Commentary
- IG spreads tightened -3bp to +79bp and total returns were -0.41%.
- Investment grade inflows were $1.64 billion.
- IG new issuance was $25.8 billion across 23 issuers. NICs were 3.8bp, order books were 4.9x covered, attrition was only 18% and spreads tightened 28bp from initial talk to final pricing.
- HY spreads tightened -10bp to +285bp and total returns were +0.21% (BBs +0.05%, Bs +0.30%, CCCs +0.77%).
- HY inflows were $1.18 billion.
- High yield new issuance was $13.375 billion including deals from Venture Global, Celanese, Herc Rentals, Hilton, Enerflex, and Post Holdings.
Our take: Rate-sensitive corporate bonds suffered with rising UST yields while credit-sensitive bonds performed well. New issue supply will wrap-up for the year shortly, and with the FOMC meeting out of the way, bonds may grind or drift into year-end. While expectations are rising for supply next year, it won’t come all at once in the first week of January, it will likely come in waves dependent on M&A deal flow and AI-related investment.
Municipal Bond Market Commentary
- The municipal bond index posted a negative return of -0.20% last week.
- Muni yields were -0.3bp, +0.2bp, +1bp, and +5bp and ratios were unchanged, -2%, -2%, and -1% to 69%, 64%, 66%, and 86% at 1, 5, 10, and 30 years respectively.
- The new issue calendar was only $3.5 billion, of which $2.8 billion was tax exempt. This week’s calendar totals $10.4 billion.
- Fund flows were +$1.193 billion including $716 million into mutual funds and $477 million into ETFs.
Our take: Getting the FOMC rate cut the market expected, coupled with waning new issue supply for the balance of the month and solid principal and interest reinvestment dollars, may set munis up for a solid glide into year-end and early 2026.
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