fOMC Commentary
- The Fed voted unanimously 12-0 to raise the federal funds rate by 25bp.
- The dot plots show 1 additional hike in 2026, with 16 out of the 18 officials showing at least 1 more hike this year.
- The FOMC statement cited that economic activity is expanding at a solid pace, domestic spending has been resilient, and today’s action will support a timelier return to the Committee’s 2% goal.
Economic Commentary
- CPI rose 0.396% which was in line with the 0.4% consensus, while the 0.290% core gain was about a tenth higher than expected. Most importantly, estimates for the Fed’s preferred core PCE deflator using the August CPI and PPI are now centered around 0.3%, which annualizes close to 4%.
- SuperCore inflation rose 0.27% in August after a 0.22% rise in July. Food prices rose 0.12% after a 0.08% rise in July. Food price pressures could grow in the coming months as diesel fuel prices are a big contributor to food production costs.
- The spike in oil prices over the weekend follows Saudi Arabia’s decision to shut down its East-West oil pipeline after attacks on Friday.
- The preliminary University of Michigan survey showed 1-year inflation expectations rose from 4.0% to 4.6%, and 5-10-year expectations rose to 3.4% after three straight months at 3.3%.
- August retail sales rose 1.2%. Sales ex-autos and gasoline rose 1.2% as well, blowing away the median forecast of 0.4%. Control group sales rose 1.4%, the biggest monthly increase since September 2024. This seems to confirm that the July weakness was indeed the move of Amazon’s Prime Day from July in 2025 to June in 2026.
Our Take
Strong August retail sales are yet another indicator that the economy has remained strong and resilient, while prices have remained high. While some of the reasons for inflation such as AI capex competing for capital or geopolitical events causing supply shocks may not be directly influenced by higher rates, the Fed wants to try and prevent price hikes from broadening out. Today’s rate hike is the first of what will likely be several rate hikes over time that could eventually moderate inflation while also restoring credibility to the Fed.
Corporate Bond Market Commentary
- Investment grade bond spreads were 1bp tighter to +80bp and total returns were -0.90%.
- IG supply was $67.6 billion across 40 issuers, slightly below the $71 billion estimate. Book coverage was 3.5x, NICs were 3bp, attrition was 22% and deals tightened 29bp from initial talk to final pricing.
- IG fund flows were +$3.88 billion.
- High yield bond spreads were unchanged at +265bp and total returns were -0.53% (BBs -0.53%, Bs -0.43%, CCCs -0.88%).
- HY bond issuance was $12 billion last week, the busiest week since early June, including deals from Wynn, TTM Technologies, Pattern Energy, Office Properties Trust, Shea Homes, USA Compression, Alcoa, Tenet, and Group 1 Automotive.
- HY fund flows were -$271.1 million, while leveraged loan inflows were +$930 million.
Our Take
Leveraged loans are up +3.4% year to date and continue to attract fund flows. This is a far cry from earlier in the year when the SAASpocalypse was driving severe concern around the much higher concentration of software and services borrowers in the loan market versus bonds. But when retail investors start chasing a trend, in this case because of the floating rate nature of loans versus fixed rates of bonds, the fund flows that follow can drive meaningful performance in these asset classes. We believe this trend could be getting extended, particularly if credit concerns re-emerge. At the same time, high-yield bonds currently offer more compelling relative value, and if rates stabilize or move lower, investor demand could begin to shift back toward fixed-rate bonds.
Municipal Bond Market Commentary
- The municipal bond market index lost -1.10% last week, pushing the MTD return to -1.65%.
- Muni yields were +19bp, +22bp, +23bp, and +19bp, and ratios were +1%, +1%, +2%, and +2% to 62%, 66%, 74%, and 91% at 1, 5, 10, and 30 years, respectively.
- Fund flows were negative for the first time in 31 weeks at -$8 million, including $393 million into ETFs and $401 million out of mutual funds.
- Last week’s new issue volume was $15.8 billion, of which $14.8 billion was tax-exempt. This week’s new issue calendar totals $12 billion, of which $11 billion is tax-exempt.
Our Take
Municipal bond fund outflows don’t usually stop at 1 week, so we would expect the trend to continue, piling on top of elevated new issuance and lower reinvestment dollars. Eventually, the relative value for crossover investors could come into the muni market and help stabilize things, but these allocators are nursing wounds all over the place right now, so the cavalry may not arrive immediately. That said, for longer term investors, the yields on offer for high-quality Munis are getting even more compelling.
Important Information
Investors should consider a fund’s investment objectives, risks, charges, and expenses carefully before investing. The prospectus contains this and other information about a fund. To obtain a prospectus, visit sheltoncap.com or call (800) 955-9988. A prospectus should be read carefully before investing.
It is possible to lose money by investing in a fund. Past performance does not guarantee future results. Any projections or other forward-looking statements regarding future events or the performance of markets, companies, or otherwise are not necessarily indicative of, and may differ from, actual events or results.
INVESTMENTS ARE NOT FDIC INSURED OR BANK GUARANTEED AND MAY LOSE VALUE.
