Weekly Fixed Income Commentary (July 18, 2024)
Economic Commentary
- Retail sales increased more than expected, as headline sales were flat versus a -0.3% consensus, and May results were revised higher. Control group sales rose +0.9% versus the +0.2% estimate. Raw non-seasonally adjusted data showed retail sales declining -5.6% month-over-month in June.
- PPI rose +0.2% in June, slightly above the +0.1% consensus. However, nearly all of the June increase is attributable to a 1.9% increase in margins for final demand trade services, which is often affected by timing issues between costs and prices and is volatile. PPI core services rose only 0.1%.
- University of Michigan consumer sentiment fell to an eight-month low in July, despite lower inflation expectations.
- The Atlanta Fed GDPNow forecast has moved up to 2.726% from 1.997% last week.
- Initial jobless claims increased by 20,000 to 243,000, the highest level since last August. Continuing claims also rose by 20,000 to 1.87 million, the highest level since November 2021.
- Chair Powell was interviewed by David Rubenstein and opined that he believes inflation is on a sustainable path to 2% and that the June CPI adds to that confidence. However, he did not take the opportunity to tee-up a July rate cut.
Our take: Other than retail sales, most other recent economic data suggests the economy is slowing and the labor market is cooling. Yet the move higher in Q2 GDP estimates needs to be acknowledged. Fed speakers have been laying the groundwork for the FOMC to use their July 31st meeting to telegraph a September rate cut. With a ~96.5% probability of a September rate cut, obviously any further data points like the retail sales figures would push back that expectation and cause some near-term volatility.
Corporate Bond Market Commentary
- High yield bond spreads tightened 8bp to +319bp and total returns were +0.88%, driven by CCCs (+1.24%), Bs (+0.92%) and BBs (+0.77%).
- HY new issuance was a modest $3 billion.
- Fund flows were +$684 million.
- Investment grade spreads were unchanged at +92bp and total returns were +0.80%.
- IG new issuance was $17.3 billion
- Fund flows were $570 million.
Our take: Solid corporate bond returns last week have continued this week as well, as money is flowing into fixed income funds at the same time that new issue supply is light. This confluence of technicals is supporting corporate bond performance. Next up is corporate earnings, which will offer insights into the strength of the consumer, and corporate margins. If companies are struggling to maintain price increases they put in place over the last few years because demand is starting to moderate, margins will suffer and eventually jobs will need to be cut to protect them.
Municipal Bond Market Commentary
- The week ending July 12 saw US Treasuries and municipals rally across the curve. AAA muni yields were down 19, 12, 4 and 5 bps at 2, 5, 10 and 30 years. The AAA municipal bond curve underperformed US Treasuries everywhere but the 2-year tenor, with US Treasury yields falling 15, 12, 10, and 8 bps at 2, 5, 10 and 30 years.
- AAA Muni/Treasury ratios fell 2% at 2 years, 1% at 5 years and were steady at 10 and 30 years to end the week at 66%, 69%, 67% and 85%. AA Muni/AA Corporate ratios followed the same pattern with ratios down 2% at 2 years, 1% at 5 years and steady at 10 and 30 years to end the week at 63%, 65%, 63% and 78% at 2, 5, 10 and 30 years.
- Municipal bond funds had inflows of $581 million, with $512 million into ETFs and $69 million into open end funds.
- The muni new issue calendar is expected to be around $11.9 billion this week.
Our take: The US Treasury and muni markets appear to have broken through the lower yield boundary of the recent trading range, with yields pushed down by a weaker than expected June CPI. While not yet a major factor, we do expect the influence of potential election outcomes to have a growing impact in the coming months as likely outcomes become clearer in the Presidential race as well as party control of the Senate and House.
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