Economic Commentary
- CPI rose 0.215% headline and 0.074% core in July, with the year-over-year headline rate slowing from 3.464% to 3.304% and the year-over-year core rate slowing from 2.594% to 2.478%. The Supercore year-over-year inflation rate slowed from 3.052% to 2.842%. The Owners’ Equivalent Rent year-over-year inflation rate slowed from 3.251% to 2.234%.
- Other alternative inflation readings such as the Cleveland Fed’s trimmed mean measure came in fairly light at +0.2% MoM in July, and the Atlanta Fed’s “flexible” CPI (purely cyclical) fell -0.5% after a -1.7% slide in June.
- PPI was unchanged in July, which beat expectations of a rise of 0.2%, but was revised up a couple of tenths from -0.3% to -0.1% in June, suggesting a two-month result in line with this month’s consensus. The year-over-year PPI inflation rate fell from 5.5% to 4.7%. Core PPI rose 0.4% and was unrevised in June. The year-over-year core rate slowed from 4.7% to 4.2%.
- The NFIB’s small business optimism index unexpectedly jumped from 97.4 to 99.8 in July. The hiring plans index had its biggest one-month increase since 1980, but the “actual employment changes” index has been falling since November. More than half of the surveyed businesses say there are no or few qualified applicants, however, and July had the highest percentage of respondents since November 2021 that said quality of labor was their single most important problem.
- Payrolls fell 23k in July, well short of the +80k consensus, and the prior two months were revised 103k lower. The unemployment rate fell from 4.2% to 4.1%, the lower end of FOMC estimates for the long-run natural rate of unemployment.
- Average hourly earnings rose 0.1%, well short of the expected 0.3%. Year-over-year growth slowed from 3.4% to 3.2%.
Our Take
The combination of the weak payrolls data (including substantial downward revisions to prior months), CPI and PPI data that could be construed as heading in a cooler direction, and muted hourly earnings growth all suggest that the Fed can stay on hold for the time being. The labor market is not at risk to being a source of inflation, but energy prices, tariffs, and supply side chokepoints from the middle east conflict all could be. Markets are now pricing in a 35% probability of a hike in September, 93.5% chance of 1 hike total in 2026, and only 1.43 hikes in total this cycle. With this data out of the way, the next catalyst could be Kevin Warsh’s Jackson Hole speech on August 28th.
Corporate Bond Market Commentary
- Investment grade bond spreads tightened -1bp to +78bp, and total returns were +0.64%.
- IG new issuance was $80 billion, the third highest week of the year, headlined by deals from Google and AbbVie. NICs were 5.3bp; deals tightened 27bp on average from IPT to final pricing; attrition was 17%, and books were 3.9x covered.
- IG fund flows were +$2.27 billion.
- High yield bond spreads tightened -15bp to +270bp and total returns were +0.77% (BBs +0.72%, Bs +0.80%, CCCs +0.99%).
- HY new issue supply was $3 billion last week, with deals from Newell Brands, Focus Financial, Arrow International, KeHE Distributors, and Onemain Finance.
- HY fund flows were a robust +$1.96 billion inflow and leveraged loan funds saw a +$797 million inflow.
Our Take
A strong rebound in corporate bond performance was driven by a turnaround in fund flows, solid corporate earnings, and stable to declining UST yields. Earnings season was a success but is largely over, and we are heading into the second half of August doldrums, where trading liquidity is thin and new issuance should abate. This environment suggests that advisors maintain dry powder for any available opportunities that may present themselves during this downtime.
Municipal Bond Market Commentary
- The municipal bond index generated a return of +0.74% last week, the best total return in 10 weeks.
- Muni yields were -9bp, -11bp, -11bp, and -6bp and ratios were -1%, -1%, -1%, and unchanged at 60%, 64%, 69%, and 85% at 1, 5, 10, and 30 years respectively.
- Fund flows were +$2.443 billion, including $718 million into mutual funds and $1.725 billion into ETFs.
- MSRB trading volume was the most active since April 2025.
- New issue volume was $20.4 billion, a 61-week high. This week’s calendar totals $14.7 billion, of which $12.6 billion is tax exempt.
Our Take
In last week’s commentary, we looked for a rebound in muni performance driven by cheaper relative and absolute yields and the solid reinvestment dollars. Now that some of that performance has materialized and is continuing this week alongside the rally in U.S. Treasuries, municipal investors may want to monitor the market as the August lull approaches, followed by potentially higher supply and lower reinvestment demand this fall.
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