Economic Commentary
- Kevin Warsh testified for two days on Capitol Hill this week. Key takeaways were that he does not view the two sides of the dual mandate to be in conflict, he is committed to Fed independence, and the members of the FOMC have no tolerance for persistently elevated inflation.
- June headline CPI fell -0.422%, cooling the year-on-year inflation rate from 4.17% to 3.46%. Core CPI was essentially unchanged, up just 0.011%, causing an entirely unexpected drop in the core inflation rate from 2.85% to 2.59%.
- June PPI fell 0.3% – the consensus was for no change – and the core, ex-food, energy, and trade services rose just 0.1%. They were expected to rise by 0.3%. Producer inflation is still higher than consumer inflation, which is expected when an inflation pulse originates in commodities like oil. The year-on-year inflation rate fell from 6.0% (revised from 6.5%) to 5.5%.
- Retail sales rose 0.2% in June, as expected. It was the smallest increase since sales were flat in January, but that’s mostly because consumers finally caught a break from falling gas prices. Sales excluding gasoline rose 0.7%, and real retail sales rose 1.1%, both strong data points.
Our Take
June CPI and PPI were surprisingly softer than expected, which should alleviate concerns the Fed would raise rates at their July meeting, and Treasury futures have re-priced expectations accordingly. The Fed can probably stay patient and wait to see if June was an anomaly or if the trend of moderating inflation continues. Meanwhile, real retail sales strength in June shows the resilience of the consumer, after powering through high energy prices.
Corporate Bond Market Commentary
- Investment grade corporate bond spreads widened 2bp to +77bp and total returns were -0.63%.
- IG new issuance was $52.5 billion across 22 issuers, including a $25 billion deal from Amazon and a $5 billion deal from Accenture.
- IG fund flows were +$5.88 billion.
- High yield bond spreads tightened 6bp to +269bp and total returns were +0.02% (BBs -0.03%, Bs +0.11%, CCCs -0.01%).
- HY new issuance was only $800 million last week, with deals from Superior Energy and Figure Technology Solutions.
- HY fund flows were +$193.7 million, and leveraged loan fund flows were +909 million.
Our Take
Where corporate spreads go should take some direction from earnings season, which began this week with blowout results from the large banks. If consumer spending remains resilient, then it would take a re-assessment of the wave of AI-related capex to dent economic growth, or a re-escalation of kinetic action in the middle east. While we do potentially see a re-assessment of spending and ROI by hyperscalers, it is probably not imminent.
Municipal Bond Market Commentary
- The municipal bond index posted a -0.37% return last week, the first negative return in four weeks.
- Muni yields were +2bp, +6bp, +8bp, and +10bp, and ratios were -1%, unchanged, +1%, and +1% to 57%, 60%, 65%, and 83% at 1, 5, 10, and 30 years respectively.
- Fund flows were +$1.683 billion, including $616 million into mutual funds and $1.067 billion into ETFs.
- Last week’s new issue volume was $11 billion. This week’s calendar totals $13 billion, of which $11 billion is tax-exempt.
- July is expected to show negative net supply for the first time in 19 months. Creditsights expects a peak net supply of $36 billion in October, a 72-month high.
Our Take
Municipal bond market technicals remain favorable through Labor Day, at which point they start to trend towards larger gross and net supply, before troughing in October. Unlike the equity market adage of sell in May and go away, Seasonal municipal market technicals often shift after Labor Day. This may warrant closer attention to supply, demand, and valuations during the fall.
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