Weekly Fixed Income Commentary (December 5, 2024)
Economic Commentary
- The ISM services index dropped to 52.1 in November, from 56.0, below the consensus, 55.7. The slump in the headline index was broad-based, with all four components—business activity, new orders, employment, and supplier delivery times—dropping back last month.
- The JOLTS survey was largely unsurprising. The number of job openings in October, 7.744 million, was a fraction better than the consensus 7.52 forecast, but the rise from September’s 7.443m was not enough to suggest anything more than noise around a declining trend stretching back to the March 2022 12.15 million all-time high.
- Jobless claims, reflecting layoffs, are near all-time lows, but the hiring rate is low, too, and as a result the percentage of unemployed out of work over 15 weeks has climbed above 40%, a rarity except during and in the immediate aftermath of recessions.
- Indeed’s daily measure of new job postings is a better measure of labor demand than JOLTS in several respects. It is more timely, less volatile and omits old postings, which go stale. Indeed’s index fell by 5.2% in October and a further 2.4% in November, hitting its lowest month-average since December 2020.
- The private sector quits rate increased to 2.3% in October, from 2.2% in September, but it remained slightly below its 2.4% average in the second half of the 2010s. It still points to a further slowdown in year-over-year growth in the Employment Cost Index measure of private sector wages and salaries to about 3.0% early next year, from 3.8% in Q3. The ratio of job openings to unemployment points to an identical slowdown in wage growth, despite also increasing modestly in October.
- Initial jobless claims increased to 224K, from an upwardly revised 215K, above the consensus, 215K. Continuing claims fell to 1,871K, from a downwardly revised 1,896K, below the consensus, 1,904K. The small rise in initial claims last week was geographically broad based, with most states reporting higher claims citing layoffs in the manufacturing and construction sectors as the main driver. Claims remain low by long-run standards, but still high enough to continue the rising trend in the unemployment rate,
- The Beige Book generally reported conditions aligning with the prevailing narrative: Overall growth has slowed, labor market turnover is low, and businesses are “having greater difficulty passing costs on to consumers.”
- Jerome Powell spoke at the NY Times DealBook conference. The primary takeaway was “The US economy is in very good shape right now.” The Fed is on a path to bring rates down to neutral now, Powell noted. But… “The economy is strong, and it is stronger than we thought it was going to be in September…the labor market is better and the downside risks appear to be less in the labor market…and inflation is coming in a little higher…So, the good news is that we can afford to be a little more cautious as we try to find neutral.”
Our take: Jerome Powell’s comments are very much consistent with the shift in market expectations since the November meeting – a 25bp December rate cut, but now there is good reason to start skipping meetings between cuts, and there is an increased likelihood of a pause next year. All of these shifting sentiments are already reflected in fed funds futures and in the cash Treasury curve. At the same time, a more thorough analysis of the labor markets suggests that not only will labor not be a future source of inflation, but also that gradual but methodical downside risk to the labor market does still exist. Companies may not be firing, but they are also not hiring. We will be paying attention to margins – if companies can no longer pass along price or have to cut prices to drive demand, they will move to protect margins by cutting costs, and labor is eventually one of the costs that will be trimmed.
Corporate Bond Market Commentary
- IG spreads widened 2bp to +82 while the significant rate move drove total returns up +1.47%.
- Fund flows were +$1.303 billion.
- New issue supply was a modest $12.2 billion in the holiday shortened week.
- HY spreads widened 11bp to +272bp and total returns were +0.41% (BBs +0.49%, Bs +0.34%, CCCs +0.28%).
- Fund flows were +$259 million.
- New issuance was only $450 million.
Our take: Interest rate stability and favorable supply demand technicals are allowing corporate bond markets to grind higher. Light new issue supply during the holiday week has turned to heavier but still manageable IG supply, while HY supply remains light, with only a handful of days remaining in the actionable calendar. Coupon and principal payments combined with steady fund inflows provide the demand underpinnings to keep the market on a strong footing, and dealers report that fund managers have cash that still needs to be put to work. Markets will likely go quiet after the FOMC meeting on December 18th until the January effect kicks-in after new year. Most 2025 outlooks from the investment banks are generally cautious but constructive, positioning next year as a carry-plus type of year. Of course, the house views have to be bullish, and with spreads at tight levels, the risks are likely skewed to the downside. Nimble and tactical will be keys to navigating markets next year.
Municipal Bond Market Commentary
- The Thanksgiving holiday week ending November 29 saw a substantial rally across the curve. AAA muni yields were down 5, 8, 12, and 17 bp at 2, 5, 10 and 30 years while US Treasury yields were down 22, 25, 23, and 23 bp at 2, 5, 10 and 30 years.
- AAA Muni/Treasury ratios were up 2% at 2 years and up 1% at 5, 10 and 30 years to end the week at 62%, 64%, 68% and 81%. AA Muni/AA Corporate ratios were up 3% at 2 years, up 1% at 5 and 10 years, and unchanged at 30 years to end the week at 64%, 62%, 64% and 76% at 2, 5, 10 and 30 years.
- For the period ending November 27 municipal bond funds had inflows of $562 million, marking 22 consecutive weeks of inflows.
- New issue supply picks up after Thanksgiving holiday, expected to be around $12.8 billion this week.
Our take: It appears that last week definitively broke the trend to higher yields on the long end of the curve that started mid-September. The markets continue to watch economic numbers, especially those related to employment and inflation, the focus now being on the Nonfarm Payroll data on Dec. 6 and CPI the following week. Potential impacts of the coming Trump administration are being analyzed as cabinet picks are announced. Municipal bond relative value supply/demand technicals continue to point to net demand with digestible issuance and strong recent fund flows.
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