Economic Commentary
- In July, the PCE price index rose 0.156% headline and 0.246% core, keeping both annual measures unchanged at a rounded 3.7% and 3.3%, respectively. The headline measure barely rounded up to 0.2%, above the consensus estimate for a 0.1% increase. The core measure, meanwhile, barely rounded down to 0.2%. Housing rose 0.3%, and supercore PCE rose 0.28%.
- Consumer confidence unexpectedly declined from 90.2 to 89.4 in August after an improvement in the present situation component was offset by a drop in expectations.
- Treasury Secretary Scott Bessent added to last week’s increased long-dated UST buyback announcement with a suggestion that Treasury may also use the Treasury General Account to fund further increases in buyback operations.
- August manufacturing PMI decreased from 53.9 to 53.2, services increased from 54.6 to 56.8, and the composite rose from 54.5 to 56.0.
- Personal income rose +0.4%, above the +0.2% consensus, while personal spending was unchanged, down from +0.4% last month but in line with estimates. Real personal spending was also flat.
- GDP was 1.5% in Q2, in line with expectations.
Our Take
All eyes will be on Fed Chair Kevin Warsh tomorrow when he speaks from Jackson Hole. He has said that he wanted the FOMC to step away from markets to let investors play the ball and not the referee. However, Treasury Secretary Scott Bessent has questioned current market pricing, suggesting they could use Treasury General Account withdrawals to fund larger buybacks, on top of the surprise increase announced last week. At the same time, there was not much progress to point to in the July PCE – something several FOMC members have pointed to as necessary in order to not hike rates.
Corporate Bond Market Commentary
- Investment grade bond spreads were 1bp wider last week to +81bp and total returns were -0.16%.
- IG fund flows were +$1.88 billion.
- IG new issuance was a lighter $21 billion last week and generally performed well, with 75% of deals closing unchanged or tighter from pricing. This week is very light at x, but August is already at $163 billion, topping the previous record in 2020 by over $20 billion. Early estimates for September are around $215 billion.
- High yield bond spreads were 3bp wider last week to +270bp and total returns were -0.15% (BBs -0.08%, Bs -0.15%, CCCs -0.68%).
- HY fund flows were $97.1 million, and leveraged loan fund inflows were $600 million.
- HY new issuance was $1.65 billion on deals from Wealthspire, Northern Oil & Gas, Jefferson Capital, and Gray Media. This week should be zero.
Our Take
After a torrid pace of issuance in August, there is a brief respite of IG issuance before the next big wave comes after Labor Day. Even if US Treasuries are stable, technicals should push spreads wider. If Treasuries do not cooperate, markets could get more volatile. The cash we suggested raising ahead of the late-August slowdown could provide an opportunity to add exposure if the expected September weakness creates more favorable entry points.
Municipal Bond Market Commentary
- The municipal bond index returned -0.51% last week.
- Muni bond issuance was $17 billion last week. This week’s calendar totals $12.8 billion, including $11.4 billion tax-exempt.
- Fund flows were +$1.145 billion, including $9 million into mutual funds and $1.136 billion into ETFs.
- Muni ratios were unchanged, +1, +2, +2 at 61%, 65%, 70%, and 87% at 1, 5, 10, and 30 years respectively.
- Investors will receive $20.9 billion of principal and $7.3 billion of interest on September 1st.
Our Take
Last week’s move higher in muni ratios continues again this week, with the 30-year reaching 88.4%, up from 82.5% back in early July. Last year this ratio peaked in late August around 95% and declined steadily through December to a low of 86%. This pattern has been similar in the last several years, even if the starting point has been different. Once visible supply increases in September and October, the market could present more opportunities for investors to add exposure.
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