Economic Commentary
- The ISM manufacturing index jumped 2.3 points from 53.3 to a four-year high of 55.6 in July, indicating the most widespread manufacturing expansion since May 2022. There was strength in new orders, production, supplier delivery times, and – for the first time since September 2023 – an above-50 contribution from employment. The combined contribution from orders, production and employment is the biggest since March 2022
- The ISM services index was a little weaker than expected – it rose from 54.0 to 54.1, falling short of the 54.5 consensus – but business activity was strongest since February, and new orders were strong, too. The rise was moderated by weakness in employment and a pullback in supplier delivery times.
- On Friday, St. Louis Fed President Alberto Musalem told the FT that the post-meeting Treasury selloff, rather than being symptomatic of markets healthily playing the ball rather than the referee, “emphasized to me that we need to continue to earn our credibility every day with both effective communications and actions as needed.” He added that “it’s very important to clearly communicate the reaction function” to the public.
- The Employment Cost Index rose 0.9% in Q2 against the 0.8% consensus, while unit labor costs rose only 1.3% as productivity was a strong 1.4%.
- The PCE deflator fell 0.109% in June, pulling the PCE inflation rate down from 4.079% in May to 3.668%. The core PCE rose 0.132%, for a core inflation rate of 3.287%. Energy prices fell 9.6% in the month but are still 26.9% higher than last June. Supercore inflation rose 0.124% in the month, following a 0.522% increase in May.
- As expected, Treasury announced it will maintain the sizes of its nominal coupon auctions for the next three months. Although the statement continues to say Treasury anticipates these sizes to be unchanged “for at least the next several quarters,” there were tweaks elsewhere that signal other changes could be on the way.
- JOLTS job openings were a little weaker than expected at 7.35 million, down from 7.54 million; the quits rate rose from 1.9% to 2.0%, and layoffs rose from a revised 1.761 million to 1.766 million.
- Durable goods orders rose 0.5%, above the consensus of 0.3% and last month’s 0.3%.
Our Take
Kevin Warsh and other Federal Reserve officials have sought to elaborate on, clarify, or refine recent comments following last week’s negative market reaction to his effort to let markets “play the ball.” Communicating less while possibly changing the data sets they use to track their inflation goals, is causing uncertainty and a steepening of the yield curve at a time when the economic data is mixed and trading liquidity will be lower during the August doldrums. It was not an ideal start to his tenure, though we expect he will learn from these early potential missteps and communicate more effectively going forward.
Corporate Bond Market Commentary
- Investment grade bond spreads were -1bp tighter to +79bp, and total returns were -0.04%.
- IG new issuance was $29.8 billion last week. NICs were 4.8bp, books were 2.9x covered, attrition was 23%, and deals were tightened 24bp on average from initial price talk to final pricing.
- IG fund flows were +$1.24 billion.
- High yield bond spreads were +6bp wider to +285bp and total returns were +0.14% (BBs +0.09%, Bs +0.25%, CCCs +0.11%).
- HY new issuance was $3 billion with deals from Morton Salt, Family Dollar Stores, and Ancestry.com.
- HY fund outflows were -$643 million and leveraged loan funds saw a +$297 million inflow.
Our Take
Volatility has reared up again, driven by the spike in UST rates and the selloff turned rally in risk assets. After the Situational Awareness market clearing event, credit markets followed equity markets higher. New issue should be muted in August, especially as we get into the second half of the month vacation season, while IG supply could remain higher after earnings blackouts as the need for AI-related proceeds remains insatiable.
Municipal Bond Market Commentary
- The municipal bond index returned +0.07% last week, the first positive return in four weeks.
- Muni yields were -1bp, +2bp, +1bp, and -1bp and ratios were +1%, unchanged, -1%, -2% to 62%, 65%, 70%, and 85% at 1, 5, 10, and 30 years respectively.
- Muni investors received $28.6 billion of principal and $9.4 billion of interest on August 1st.
- Higher yields attracted fund flows of $1.58 billion, of which $1.72 billion was ETF inflows while mutual funds saw a $140 million outflow.
- Last week’s new issue volume totaled $11.3 billion, of which $10.6 was tax-exempt.
- This week’s new issue calendar totals $18.4 billion, of which $16.7 billion is tax-exempt.
Our Take
July was an ugly month for municipal bonds due to the significant rise in US Treasury yields, despite favorable reinvestment dollars and fund flows. August technicals are also constructive, and fundamentals started the month looking better on a relative and absolute value basis. After Labor Day, the technicals likely turn less favorable, with fewer reinvestment dollars through the fall and possibly a substantial rise in new issuance. That backdrop may favor adding selectively at current levels while preserving flexibility to trim exposure if the market rallies and valuations become less compelling this fall.
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