Economic Commentary
- August PCE matched consensus at +0.3% month over month, while the year-over-year increase of 3.4% was below the 3.7% consensus. The core PCE deflator rose 0.2%, below the 0.3% consensus, and 3.0% year over year versus the 3.3% estimate. The BEA’s methodological update and revisions to past data shaved roughly 20bp off recent annual inflation calculations.
- Q2 GDP was revised from 1.5% to 2.2%.
- The Atlanta Fed GDPNow Index for Q3 was revised from 5.02% down to 3.74%.
- Fed speakers painted a somewhat mixed picture. Presidents Goolsbee and Musalem both emphasized the near-term inflationary risks of AI demand, alongside broader potential productivity gains, while Governor Barr reiterated that in his base case, “further adjustments” will be necessary to get inflation back to target. On the other hand, Governor Williams stressed that there is “no need for urgency” after the hike at the September meeting, and that his base case is for one more hike late this year, putting Williams in line with the median SEP participant.
- Fed funds futures slightly pared expectations for an October rate hike to only 24% but continue pricing in one more hike by the end of this year.
- August durable goods orders were unchanged and rose +0.3% excluding transportation.
- The University of Michigan consumer sentiment index rose from 47.8 to 48.1, and inflation expectations remained well-anchored at 3.4% for 5-10 years. However, the Conference Board consumer confidence index plunged from 89.4 to 81.9; the present situation index fell from 121.2 to 109.3, and expectations fell from 68.2 to 63.6, all well below estimates.
- Personal income only rose 0.2%, while personal spending rose 0.9%, indicating that consumer spending remains strong, albeit perhaps above the trend in income.
- The ISM Manufacturing Index for September was 54.5, below estimates of 55.0. New orders rose from 53.7 to 55.3, while prices paid rose sharply from 71.1 to 77.9.
Our Take
The general consensus is that the economy remains strong, the consumer remains resilient, inflation is still elevated, uncertainty around the conflict with Iran persists, and interest rates continue to move higher while bond market volatility remains elevated. There are many ways this story reverses – AI spending slows down if the return-on-investment case becomes less compelling, the cumulative pressure of inflation and interest rates on the consumer dents spending, the war gets resolved, or interest rate hikes and tighter financial conditions slow the economy enough to justify lower rates. We cannot predict the likelihood or timing of any of this, but 10yr UST yields at 5.25% make the risk / reward more favorable by the day.
Corporate Bond Market Commentary
- Investment grade bond spreads widened 4bp to +81bp last week and total returns were -1.01%.
- IG new issuance was $34.5 billion across 23 issuers, shy of the $40 billion estimate. Book coverage was 3.9x, NICs were 4.2bp, attrition was 16% and deals tightened 28bp on average from initial price talk to final pricing. September issuance was $209.9 billion. The estimate for October is $122 billion.
- IG fund flows were +$1.8 billion.
- High yield spreads widened 25bp to +293bp and total returns were -0.93% (BBs -0.94%, Bs -0.89%, CCCs -1.02%).
- Leveraged loans had their first weekly decline since July 31.
- High yield new issuance was $17 billion, including deals from Solaris Energy, Millrose Properties, Osisko Gold, AMC Entertainment, Softbank, Alro Steel, and Air Transport Services.
- HY fund flows were +$545 million. Leveraged loan fund flows were +$1.3 billion.
Our Take
When looking at data from the last twenty years, from the current all-in yields we have tended to see strong total returns for both BBs and single Bs on both a short term and longer-term time horizon. At the current yield-to-worst for BBs & Bs, average 3-month returns are 2.9%/2.8% and average 12-month returns are 8.4%/9.5%.
Municipal Bond Market Commentary
- Muni yields were +53bp, +43bp, +33bp, and +21bp, and ratios were +11%, +7%, +4%, and +1% to 75%, 73%, 78%, and 93% at 1, 5, 10, and 30 years respectively.
- The muni index yield to worst hit its highest level since January 2009.
- Fund flows were +$708 million, including $2.163 billion into ETFs and -$1.455 billion out of mutual funds.
- New issue volume was $14 billion last week, with $13 billion tax-exempt. This week’s calendar is $16 billion, of which $15 billion is tax-exempt.
- $28 billion of principal and interest was scheduled to be paid out to investors on October 1, and the total for October is $40 billion.
Our Take
There is no sugarcoating recent performance – munis had their worst monthly performance since 1987. Fund flows have remained surprisingly supportive despite the negative performance, while new issue supply is elevated but not quite as high as expected. The calendar remains less favorable for principal and interest reinvestment dollars, but the blowout in ratios makes the relative value of munis versus taxables and corporates more favorable by the day. In particular, the short and intermediate part of the curve is finally cheapening up on a relative basis for what feels like the first time in a long time, so for investors averse to going out longer on the curve, this is a possible way to add some exposure.
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.
