Economic Commentary
- The Administration chose Kevin Warsh as the nominee to be the next Fed Chair. During his previous term on the Fed 10 years ago, he was hawkish but also favored a smaller Fed balance sheet. He will likely enjoy more credibility than some of the other potential candidates, and should also be a supporter of the independence of the Federal Reserve.
- Treasury announced its financing estimates, projecting $574 billion in Q1 and $109 billion in Q2. The composition of issuance will be unchanged for the near future, as expected.
- December PPI rose 0.5%, a much bigger increase than the 0.2% consensus, thanks to a 0.7% rise in services. Goods were unchanged thanks to declines in both food and energy prices. Transportation and warehousing rose 0.5%. The PPI ex-food, energy, and trade services rose 0.4%. On a year-on-year basis, the core PPI is grinding sideways at 2024 levels, after dropping in early 2025.
- The ISM Manufacturing Index rose from 47.9 to 52.6 in January – the first print above 50 since January of last year, and the highest headline reading since August of 2022. The spike in the headline index was due to a pop in new orders, which surged nearly 10 points to 57.1. Employment also picked up, rising from a revised 44.8 to 48.1. Although new orders, backlog of orders, and new export orders are positive signs for the start of the year, they are tempered by commentary citing that January is a reorder month after the holidays, and some buying appears to be to get ahead of expected price increases due to ongoing tariff issues.
- The ISM Services index was unchanged at 53.8 — suggesting expansion overall — but the survey’s employment and new orders components both fell.
- Challenger, Gray & Christmas announced 108,435 job cuts in January, a 118% increase from last year and the largest number for January since 2009. Hiring intentions declined 13% from last year to 5,306.
- ADP reported the private sector added 22k jobs in January, less than half the 45k consensus.
- In the JOLTS report, job openings were only 6.542 million, well below the 7.25 million estimate and down sharply from the original 7.146 million and revised 6.928 million figure in the previous month.
- After the government shutdown was resolved, the BLS says the January jobs report, originally scheduled to be released this Friday, will be published next Wednesday February 11. The January CPI will also be pushed back a couple days and be released Friday, February 13.
Our take: This week brought several weak data points on the labor market from ADP, Challenger, and JOLTS. Given that the Fed appears to be on hold or in an extended pause, they would need to see either further moderation of inflation or a renewed slowdown in the labor markets to cut rates again. Given all of the noise in the data due to catch-up from government shutdown delays, seasonal adjustments around year-end and the new year, and macroeconomic policies that change frequently, we’ll need to see some more data points in the days and weeks ahead to confirm a trend and get enough consensus amongst FOMC members to move.
Corporate Bond Market Commentary
- Investment grade bond spreads were +1bp wider to +74bp last week and total returns were -0.07%.
- The IG market priced $234 billion across 122 issuers in January. Last week the IG market priced $36.9 billion across 15 issuers. Books were 4.0x, NICs were 1.2bps, attrition was 30%, and deals were tightened an average of 26bp from IPT to final pricing
- Fund flows into IG were +$5.4 billion.
- High yield bond spreads were +12bp to +280bp last week and total returns were -0.17% (BBs -0.02%, Bs -0.21%, CCCs -0.89%).
- Fund flows into high yield were +$233 million, and +$234 million into leveraged loans.
- HY new issuance was $5 billion last week, including deals from CVR Energy, Howden, United Airlines, Azul, Team Services, and Biomarin Pharmaceutical.
Our take: Equity and credit markets are reacting strongly this week to fears of disintermediation or obsolescence in the software and SAAS industries as new versions of Anthropic’s Claude AI are targeted at real world applications such as basic legal work or financial analysis, which could render the traditional software business less competitive or even obsolete. The weakness was further exacerbated by BlackRock TCP Capital (TCPC), which surprised the investors when it disclosed a 19% decline in the NAV of its investment portfolio. While these may be valid concerns overall, this is a bigger problem for leveraged loan markets (~20-22% exposure to software) and private credit markets (~30% exposure to software) and less so for high yield bond markets (~5% exposure to software). We have been watching private credit, middle-market loans/CLOs, and BDCs, where strong inflows and competitive pressure to invest may have contributed to looser underwriting; over-concentration to software is one example of potential concern. Writedowns, attempted redemptions, and even forced windowns of certain structures are likely, which could create attractive contrarian opportunities for liquid credit strategies to take advantage of.
Municipal Bond Market Commentary
- The municipal bond index returned +0.28% last week and is now up +0.73% year-to-date.
- Fund flows were +$2.623 billion with $691 million into mutual funds and $1.932 billion into ETFs.
- Muni yields were -3, -3, -3, and -1 and ratios were unchanged, unchanged, -1%, and -1% to 64%, 58%, 61%, and 85% at 1, 5, 10, and 30 years respectively.
- Last week only $5 billion of bonds priced, of which $4.4 billion was tax-exempt.
- This week’s calendar includes $8.5 billion, of which $7.7 billion is tax-exempt.
Our take: A dip in new issue supply coincident with the strong February 1 principal and interest reinvestment dollars supported strong relative performance for municipal bonds last week. 30-day visible supply looks to be at reasonable levels which should allow solid performance to continue, as strong tax revenues and modestly declining rates could blunt the need for higher than expected future issuance.
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