Weekly Fixed Income Commentary (September 5th, 2024)
Economic Commentary
- The week kicked off with the price of oil giving back its YTD gains, which was a catalyst for lower rates upon exiting the long Labor Day weekend. Copper prices are down 20% since May, in another troubling sign for the economy.
- The headline ISM reading of 47.2 was up slightly from the previous month but below consensus of 47.5, and marks the fifth straight month of contraction. The mix among ISM components was weak – production is falling (from 45.9 to 44.8) and new orders are contracting (from 47.4 to 44.6).
- The July JOLTS report showed job openings of 7.673 million, almost 500,000 below expectations. Openings fell in healthcare and state and local government, which have been a very large driver of job creation over the last few years, which is another ominous sign. The vacancy rate of 4.6% is the lowest since December 2020. The openings to unemployed ratio of 1.1 is also the lowest rate in three years, down from the peak of 2. The number of layoffs rose to 1.76 million, the highest since March 2023, led by leisure and hospitality firms, which tend to be leading indicators on labor demand.
- July PCE and core PCE both rose +0.2%, as expected. The three-digit unrounded increases were +0.155% and +0.161%, even better than at first glance. The year-over-year increases of +2.5% and 2.6% are supportive of rate cuts.
- The Fed’s Beige Book was the weakest since the winter of 2020, as 9 out of 12 districts reported flat or declining economic activity.
- The Atlanta Fed GDPNow estimate is down to 2.1%, even before yesterday’s soft August vehicle sales report gets factored in.
- The un-inversion of the 2s/10s yield curve is another recession signal.
- ADP job gains of 99k are the lowest since early 2021, another data point the labor market is softening.
Our take: Recent economic data reveal more definitive signs that the economy is slowing, and the labor market is cooling. It will only get worse, as labor market statistics are lagging in nature. The Fed already told us they would not welcome any further cooling in the labor market, and therefore they will need to be proactive by cutting rates. We are starting to get enough data that could justify a 50bp cut in September. Friday’s nonfarm payrolls number can add clarity to the magnitude of the first rate cut. Whether or not the Fed wants to go there or not, the future path of rate cuts, which is more important to the intermediate and long end of the UST curve, is looking more justifiable in pricing in ~9 cuts by the end of next year and a terminal rate of ~2.875%. Keep buying high quality bonds and keep moving cash out of T-bills and money market funds.
Corporate Bond Market Commentary
- IG spreads tightened 1bp to +95 but higher UST yields drove total return losses of -0.54%.
- Fund flows into IG were +$832 million.
- IG new issue supply was a modest $2.05 billion in the quiet end of summer week.
- However, 29 deals came on Tuesday alone for a massive $43.275 billion of supply – the largest ever number of issuers and the third largest dollar volume day on record.
- HY spreads tightened 6bp to +313bp and total returns were +0.17% led by CCCs (+0.35%), Bs (+0.20%) and BBs (+0.12%).
- Fund flows into HY were +$651 million.
- No new issues priced in HY last week.
Our take: The calm of late August has turned to a predictable flurry in September. The massive wave of new issuance has begun, and so far, it is being absorbed well, with very modest concessions and secondary spreads only modestly wider. Fund flows have been supportive to technicals, and should continue as we get past the actual first Fed rate cut in September. We continue to add to our up in quality/out in duration positioning. Actively participating in the flurry of new issuance and trading around these deals should also be a source of alpha over the coming weeks.
Municipal Bond Market Commentary
- Yields moved higher in US Treasuries and long municipals while short term muni rates fell slightly for the week ending August 30. AAA muni yields were down 2 bps at 2 and 5 years, and up 1 bp at both 10 and 30 years. The AAA municipal bond curve outperformed US Treasuries across the curve, with US Treasury yields rising 0, 5, 10, and 10 bps at 2, 5, 10 and 30 years.
- AAA Muni/Treasury ratios fell, down 1% at 2 and 5 years, and down 2% at 10 and 30 years to end the week at 63%, 67%, 69% and 87%. AA Muni/AA Corporate ratios were mixed, up 2% at 2 years, down 1% at 5 years, and down 2% at 10 and 30 years to end the week at 62%, 63%, 65% and 80% at 2, 5, 10 and 30 years.
- For the period ending August 28 municipal bond funds had inflows of $1.05 billion, the 9th consecutive week of reported positive flows.
- The muni new issue calendar is expected to be around $8.3 billion in this holiday shortened week.
Our take: Though rates moved slightly higher last week, the trend to lower rates appears to be intact and the economic data hasn’t given the market any reason to doubt that the Federal Reserve will begin cutting interest rates this month. Friday’s nonfarm payroll numbers and next week’s CPI will be the last major economic hurdles between now and the FOMC meeting on September 18.
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