Economic Commentary
- Headline CPI matched consensus with a +0.3% increase, and Core CPI was softer than expected at +0.2% versus the +0.3% expectation. Core services increased +0.29% while core goods were essentially flat.
- Supercore inflation was more than a percentage point lower in 2025 than 2024, declining from 3.98% to 2.87%. In 2026 when many of the tariff effects may drop out of the calculations, headline and Core CPI could head even lower and approach the Fed’s 2% target.
- ISM Services, an indicator of business sentiment, beat forecasts to reach a fifteen-month high of 54.4. ISM Employment also flipped into expansion at 52 – the highest in ten months.
- Sunday evening, Fed Chair Powell released a statement that the Department of Justice had subpoenaed the Federal Reserve as part of an investigation related to the renovation of the Fed office buildings.
- The unemployment rate declined to 4.4% from a downward revised 4.5% in the prior month, reversing the reported increase that occurred between September and November.
- Nonfarm employment increased 50,000 last month, after a modestly downward-revised gain of 56,000 in November. Private employment growth averaged 29,000 per month in the fourth quarter. The average workweek ticked down to 34.2 hours and average hourly earnings rose a trend-like 0.3% last month and were up 3.8% over a year-ago.
- The Atlanta Fed GDPNow is currently tracking Q4 growth at 5.3%.
- Nonfarm productivity rose at a 4.9% annual rate in the third quarter, the most since 2023. Unit labor costs fell -1.9% in Q3 despite a +4.3% increase in compensation.
Our take: Nonfarm payrolls increased by just 50,000 in December and declined by 67,000 over the fourth quarter as a whole. Historically, negative quarterly job growth has been rare outside of recessions. Part of this decline may reflect government workers who accepted buyouts earlier in the year and subsequently rolled off payrolls during the quarter. Still, broader trends—such as moderating average hourly earnings and unit labor costs—provide market-based evidence that the labor market is softening. Unusually, this is occurring even as overall economic growth remains firm, though that growth is exerting less upward pressure on inflation than might typically be expected.
Corporate Bond Market Commentary
- IG spreads were -1bp tighter to +78bp and total returns were +0.33%.
- Fund flows were +$4.3 billion.
- New issuance was $90.2 billion across 52 issuers, the fourth highest weekly total ever. NICs were 2bp, books were 4.1x covered, attrition was 18% and deals tightened 28bp on average from IPT to final pricing.
- HY spreads were -9bp tighter to +274bp and total returns were +0.40% (BBs +0.30%, Bs +0.40%, CCCs +0.98%).
- HY fund flows were +$278 million and leveraged loan fund flows were +$514 million.
- HY new issuance was $9.68 billion across eleven deals including Six Flags, Charter, Calumet, Osaic, Clearway Energy, Murphy Oil, CompoSecure, Level 3, Vornado Realty, and Installed Building Products.
Our take: The Administration’s call for Fannie Mae and Freddie Mac to purchase $200 billion of mortgage bonds quickly drove the yield on current coupon MBS from 5.18% in mid-December to 4.90%. MBS has offered higher yields than US IG and has served as an attractive alternative for fixed income investors, but the MBS yield pickup over US IG has shrunk to almost zero. This change in relative value is likely to shift incremental demand from cross asset investors towards US IG – especially in front-end IG – and create a supportive demand technical for the asset class at a time when a massive increase in IG issuance is expected in 2026.
Municipal Bond Market Commentary
- The municipal bond index posted a +0.52% return last week.
- Last week’s issuance was $7.0 billion. This week’s new issue calendar totals $11.3 billion, of which $10 billion is tax-exempt.
- Last week muni yields were -14, -11, -11, and -5 and ratios were -5%, -3%, -2%, and unchanged at 66%, 60%, 62%, and 85% in 1, 5, 10, and 30 years respectively.
- Fund flows were +$1.988 billion, with $651 million into mutual funds and $1.337 billion into ETFs.
Our take: A solid start to the year in the muni market as ample reinvestment dollars are available to absorb at least the initial wave of new issuance. Retail-driven fund flows often follow a run of good performance, and if that pattern holds, this demand should continue to provide a supportive backdrop to the muni market.
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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.
It is possible to lose money by investing in a fund. Past performance does not guarantee future results. Any projections or other forward-looking statements regarding future events or performance of markets, companies, or otherwise are not necessarily indicative or differ from, actual events or results.
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