Weekly Fixed Income Commentary (July 11, 2024)
Economic Commentary
- The June CPI report was universally good. Headline CPI fell -0.1% and is at 3.0% year over year. Core CPI rose only +0.064% and is down to +3.3% year over year. Importantly, shelter rose only +0.2% and Owner’s Equivalent Rent +0.3% after 3 months of +0.4% readings.
- June nonfarm payrolls were +206k adds versus a +190k expectation. Education and Government were the two largest adders, while professional and business services and manufacturing lost jobs.
- Downward revisions to April and May payrolls more than negated the slight upside surprise to June. With the minor uptick in the unemployment rate from 3.964% to 4.054%, there’s scant evidence the labor market is overheating.
- Now that the unemployment rate has risen 0.5% from its low, there is much chatter about the Sahm Rule which suggests that a recession is already underway.
- Average hourly earnings rose 3.9% year over year, the lowest since June 2021.
- The ISM Services index contracted at the fastest pace since Covid lockdowns and is at levels similar to 2001, 2008 and 2020.
- Based on an NAHB analysis of the Census Bureau’s Characteristics of Units in New Multifamily Buildings Completed, there were 450,000 multifamily units completed in 2023, reaching the highest level of multifamily completions since 1987. This supply glut should start to push down rents and the housing component of CPI.
- Jerome Powell’s congressional testimony offered little groundbreaking information, but did continue to highlight that the one-sided risk of inflation in the dual mandate has become more balanced now that the labor market is showing signs of slowing
- The Citi Economic Surprise Index continued to roll over last week, reaching a low of -47.5 before bouncing slightly.
Our take: Economic data is slowing, and Jerome Powell subtly moved the Fed from solely focused on price stability to a more balanced view of risks between the labor market and price stability. This is not a coincidence, as he is beginning to lay the foundation for a September rate cut. Expect FOMC commentary to subtly echo these sentiments, and the July FOMC meeting to more clearly articulate this game plan. Today’s CPI report was a crucial step on this path forward.
Corporate Bond Market Commentary
- Bond funds had their biggest inflow since February 2021 at $19 billion.
- Investment grade bond spreads tightened 4bp to +92bp. Combined with falling UST rates, total returns were +0.93%.
- New issue suply was $5.35 billion.
- Fund flows were +$1.166 billion.
- High yield bond spreads widened 9bp to +327bp and total returns were +0.25%.
- There was zero new issuance during the holiday week.
- Fund flows were +$425 million.
Our take: As discussed above, the FOMC will be setting the stage for a first rate cut in September. Last week already had the largest inflow into bond funds in 3.5 years. The symbolic nature of the first cut as an ‘all clear’ sign to fixed income investors, coupled with the enviable funding positions of pension plans, should trigger a tsunami of fund flows into duration fixed income. Investors should already be starting to position themselves accordingly. High quality fixed income will benefit from the move lower in rates and be resilient in an economic slowdown. The Shelton Tactical Credit Fund is well positioned to help investors carefully navigate this tactical shift in fixed income allocations.
Municipal Bond Market Commentary
- The week ending July 5 saw a small rally in US Treasuries and very little change in municipals. AAA muni yields were down 2 bp at 2 years, flat at 5 and 10 years, and up 1 bp at 30 years. The AAA municipal bond curve underperformed US Treasuries as those yields fell 15, 15, 12, and 8 bps at 2, 5, 10 and 30 years.
- AAA Muni/Treasury ratios rose 2% across the curve to end the week at 68%, 70%, 67% and 85%, respectively. AA Muni/AA Corporate ratios were up 1% at 2 and 10 years and up 2% at 5 and 30 years to end the week at 65%, 66%, 63% and 78% at 2, 5, 10 and 30 years.
- The muni new issue calendar is expected to be around $11.9 billion after last week’s very small calendar due to the mid-week Independence Day holiday.
- Municipal bond mutual funds saw $419 million of inflows and ETFs saw $304 million of inflows.
Our take: The US Treasury and muni markets continue to be range bound. With many participants out on vacation it was a slow week for the markets, with the focus being on the nonfarm payrolls release on Friday. This week the focus was on Fed Chairman Powell’s ‘Humphrey Hawkins’ testimony to the Senate Banking and House Financial Services committees, and the monthly CPI and PPI numbers. While not yet a major factor, we do expect the influence of potential election outcomes to have growing impact in the coming months and likely outcomes become clearer in the Presidential race and control of the Senate and House.
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