Economic Commentary
- Payrolls increased 64,000 in November and decreased 105,000 in October, adding some confusion to recent labor market data. The decrease was driven in part by a 157k decline in government workers as DOGE layoffs earlier in the year finally kicked-in.
- The unemployment rate jumped to 4.6% in November. There was no October reading.
- Average hourly earnings rose only +0.14%, the slowest pace since February 2022. The year-over-year increase was 3.5%.
- Retail sales were unchanged in October and were revised down a tenth to 0.1% in September. A 1.6% drop in motor vehicle and parts sales offset decent sales growth elsewhere. Control group sales were +0.8%.
- December PMIs came in below expectations – manufacturing PMI was 51.8 (52.1 estimate), services PMI was 52.9 (54.0 estimate) and composite PMI was 53.0 (53.9 estimate).
- CPI decelerated from 3.023% in September to 2.619% in November, implying an average monthly increase of 0.102%. The core rate fell from 3.026% in September to 2.619% in November, implying an average monthly increase of 0.080%. Both CPI readings were well below expectations; however, caution may be warranted given the data collection effort was impacted by the government’s shutdown. Decreases in housing would be quite welcomed, and the food-related decreases could be attributable to recent reductions in tariffs on certain food imports.
Our take: Encouraging CPI data, if the trend is proven by future readings, would provide the cover the Fed would need to justify additional rate cuts. Recalcitrant FOMC voters, even those who acknowledge downside risk in the labor market, are concerned about persistent inflation. The next reading comes on January 13th, well before the next Fed meeting on January 29th.
Corporate Bond Market Commentary
- Investment grade bond spreads were 1bp wider to +80bp, and total returns were -0.27%.
- IG new issuance was $4.7 billion across eight issuers, well below the $15 billion expected. NICs were 5bp, order books were 3.3x oversubscribed, attrition was 17%, and deals were tightened 28bp on average from IPT to final pricing.
- Fund flows into IG funds were +$1.7 billion.
- HY spreads were 6bp wider to +291bp and total returns were -0.14% (BBs -0.17%, Bs +0.01%, CCCs -0.44%).
- HY fund flows were +$542 million and leveraged loan funds saw outflows of -$123 million.
- New high yield issuance was $7.125 billion last week including deals from Transalta, Arbor Realty, Asurion, Antero Midstream, Level 3, and Surgery Centers. This week two deals priced $1.1 billion for the most likely final deals of 2025.
Our take: Estimates for 2026 investment grade bond issuance range from $1.75 trillion to $2 trillion, and the average is $1.836 trillion. This would mark an ~11% increase from the 2025 total of $1.659 trillion. These increases are expected to be driven by a pickup in M&A activity and the continued ramp in AI-related spending. This increased activity should provide ample opportunity to trade the new issue market and offer better entry points if it pushes spreads wider.
Municipal Bond Market Commentary
- The municipal bond index was slightly lower last week at -0.02%.
- Muni yields were -0.3bp, -0.6bp, unchanged, and +3bp and ratios were +1%, -1%, -1%, and unchanged to 70%, 63%, 65%, and 85% at 1, 5, 10, and 30 years respectively.
- Last week $14 billion of new issuance priced, of which $13 billion was tax-exempt. This week’s new issue calendar totals $7.1 billion, of which $6.5 billion is tax-exempt.
- Fund flows were +$725 million, with ETF inflows $1.121 billion and mutual fund outflows -$396 million.
Our take: This should be the last week of meaningful issuance this year. January 1 principal and interest payments to be reinvested should allow 2026 to get off to a decent start. Expectations for issuance in 2026 are high, but will not come all at once, bringing some volatility over the course of the year and opportunities to actively add and reduce exposure at better entry and exit points.
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Investors should consider a fund’s investment objectives, risks, charges and expenses carefully before investing. The prospectus contains this and other information about a fund. To obtain a prospectus, visit www.sheltoncap.com/ or call (800) 955-9988. A prospectus should be read carefully before investing.
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