Economic Commentary
- Nonfarm payrolls rose 130k in January, the most since a 237k rise in December 2024. Most of the gains were in healthcare.
- After a large downward revision of 862,000, payrolls rose only 181k for all of last year, an average monthly gain of 15k.
- Average hourly earnings rose 0.4% to $37.17 an hour. Average weekly earnings rose 0.7%, reflecting a 0.3% increase in the workweek. Average hourly earnings growth slipped just a bit on a year-on-year basis from 3.73% to 3.71%.
- The Q4 Employment Cost Index rose only 0.7%, its lowest increase since the second quarter of 2021. This is the most comprehensive measure of employee compensation published by the BLS and accounts for much of the noise in the average hourly earnings series. The low increase last quarter is an important piece of evidence arguing that there is slack in the labor market, even accounting for any decreases in labor supply growth from changes to immigration policy.
- Delinquency rates on loans ranging from mortgages to credit cards rose to 4.8% of all outstanding US household debt in the fourth quarter, the highest level since 2017, driven by higher defaults among low-income and young borrowers. The share of credit-card loans that were at least 90 days delinquent rose to 12.7% — the most since the first quarter of 2011 — and the share of auto loans in serious delinquency climbed to 5.2%, just shy of the record reached in 2010. Some 16.3% of student-loan debt became delinquent in the fourth quarter, the biggest increase on record in data going back to 2004.
- The NY Fed’s year-ahead inflation expectations fell from 3.42% to 3.09%, the lowest since last June, mirroring a similar sharp drop in the University of Michigan’s year-ahead inflation finding.
- Retail sales were flat in December and weak across almost all major categories. Because the Census Bureau is still a month behind reporting sales, we already know January car sales were easily weak enough to result in a drop in retail sales next month, too, meaning we are set up for back-to-back consumer disappointment.
Our take: Over the last few weeks there have been many data points, somewhat conflicting or confusing, on the state of the labor market. Massive downward revisions to prior periods suggest little hiring. The January payroll report was quite strong on its face; however, most of the gains were in healthcare and are arguably more structural due to the demographics of an aging population that requires more healthcare, rather than an indication of a cyclical pickup in more economically sensitive sectors. Furthermore, all of the recent data on hiring intentions, layoff announcements, job openings, and others suggest that more muted gains or further weakness lies ahead. One labor-market indicator we watch closely is the Employment Cost Index (ECI). Recent readings suggest compensation pressures may be easing, which could indicate some slack in the labor market and, if sustained, may reduce the risk of wage-driven inflation
Corporate Bond Market Commentary
- Investment grade bond spreads were +2bp wider to +76bp last week and total returns were +0.24%.
- Fund flows into IG were +$6.4 billion.
- Investment grade issuance of $60 billion was well above the expectations of $40 billion. Deals across 19 issuers, including Oracle, saw NICs of 1.6bp, order books 3.5x covered, attrition of 28% and deals tightened 27bp from IPT to final pricing.
- High yield bond spreads were +7bp wider to +287bp and total returns were +0.13% (BBs +0.19%, Bs +0.09%, CCCs -0.10%).
- Fund flows into HY were +$421 million, and +$606 million into leveraged loans.
- New issuance in HY was $5 billion including deals from Performance Food Group, Black Pearl Compute, Howard Huges, United Airlines, and Gee Automotive.
Our take: Investment grade issuance continues unabated, with jumbo deals to finance AI infrastructure buildouts coming early and often. We have not yet seen indigestion or crowding out of other borrowers, but that risk still lingers out there. High yield issuance has continued to be more muted and less interesting but should pick up after high yield borrower earnings are released over the coming weeks. Meanwhile, AI adoption is increasingly affecting a wider range of industries, with impacts now being felt beyond software in insurance brokerage, wealth management, and outsourced pharmaceutical contract research. In a year looking like a carry less/plus type of environment, avoiding downside potholes is just as important as finding idiosyncratic winners.
Municipal Bond Market Commentary
- The municipal bond market index returned +0.39% last week.
- Yields were -9, -6, -3, and -1 and ratios were -2%, -1%, unchanged and unchanged to 62%, 57%, 61%, and 85% at 1, 5, 10, and 30 years respectively.
- Fund flows were +$2.085 billion, including $1.477 billion into mutual funds and $608 million into ETFs.
- New issue volume was $9.9 billion, and this week’s calendar is $13.7 billion, of which $12.8 billion is tax-exempt.
- February 15th principal and interest payments will be $26 billion.
Our take: The solid performance of municipal bonds is running into an elevated amount of new issuance this week but seems to be handling it well. Another substantial wave of principal and interest payments arrive on February 15, which will help further support the market in the weeks ahead. However, the next few months will bring lower amounts of P&I reinvestment dollars, so if a continued robust new issue calendar is not met with continuing fund inflows, there could be some modest weakness ahead. Any such pullback should be temporary and technical rather than fundamental and would present an opportunity to add at a better valuation.
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