Weekly Fixed Income Commentary (December 12, 2024)
Economic Commentary
- US labor costs grew less than initially estimated in the third quarter after a downwardly revised decline in the prior three months, adding to evidence the job market is no longer a source of inflationary pressure. The ECI increased at a 0.8% annualized rate from July through September, following a revised 1.1% decrease in the prior period. The initial labor costs reading had shown 1.9% gain in the third quarter. The adjustments to both periods reflected downward revisions to hourly compensation. Productivity rose at an unrevised 2.2% annualized rate in the July-to-September period after rising at a 2.1% pace in the prior quarter.
- The 227K increase in nonfarm payrolls in November was relatively subdued, after the mere 36K gain in October, which was dampened by hurricanes and strikes. The two-month average, 132K, is below the 191K average in the first nine months of the year and probably below the current breakeven rate of about 175K. What’s more, revisions likely will reveal a weaker picture as just 67% of businesses in the sample replied in time for the first estimate of November payrolls, below the 74% November average in the 2010s. Between January 2023 and September 2024, revisions to month-to-month growth in payrolls have averaged minus 35K between the first and third estimates, with just over half of that due to downward revisions to the unadjusted data as late responses are included.
- The unemployment rate unexpectedly increased from 4.145% to 4.246%, effectively returning it to its July high, while aggregate hours worked growth in the past two months was tepid at best.
- Initial jobless claims jumped to 242K, from an upwardly-revised 225K, well above the consensus, 220K. Continuing claims rose, to 1,886K, from a downwardly-revised 1,871K, also above the consensus, 1,877K.
- The 0.3% rise in the core CPI was powered by jumps in vehicle and hotel room prices, which are volatile. These components have a much smaller weight in the core PCE, which likely rose by just 0.2%. The +0.23% rise in OER was the smallest since early 2021.
- The headline November PPI rose by 0.4%, above the consensus, 0.2%. Net revisions were zero. The core PPI increased by 0.2%, matching the consensus, 0.2%. Net revisions were zero. The core ex-trade services index increased by 0.1%, slightly below the consensus, 0.2%. Net revisions were also zero. The November core PCE deflator should be lower in response to these PPI numbers. Portfolio management prices fell by 0.6%, despite recent increases in stock prices. In addition, unadjusted PPI domestic air passenger transportation prices fell by 4.0%, much more than the 1.1% drop a year ago, consistent with a small seasonally adjusted fall. The PPI healthcare components that feed into the core PCE calculation also were little changed from October.
- The Fed will have ample opportunities for communication next week in the press conference and in the dot plots. Powell is bound to note the recent lack of progress on the inflation front as more reason to emphasize the “luxury to move deliberately,” which is to say to start skipping meetings even if inflation were to start drifting lower again. The September SEP forecast of four cuts in 2025 was consistent with an every-other-meeting pace. Don’t be surprised if the December SEP shows even fewer cuts. The market now is priced for two or three cuts next year.
Our take: The Fed will have ample opportunities for communication next week in the press conference and in the dot plots. Powell is bound to note the recent lack of progress on the inflation front as more reason to emphasize the “luxury to move deliberately,” which is to say to start skipping meetings even if inflation were to start drifting lower again. The September SEP forecast of four cuts in 2025 was consistent with an every-other-meeting pace. Don’t be surprised if the December SEP shows even fewer cuts. The market now is priced for two or three cuts next year. The rates outlook is hazy. The job market appears to be slowly but steadily deteriorating, with wages and the employment cost index indicating that the labor market should not be a future source of persistent inflation. Goods prices may not be deflating but should also not be a persistent source of inflation. Services prices are the wild card, driven by housing and to a lesser extent other items. The moderation in housing inflation no doubt has taken longer but eventually should arrive. However, government policy is now a wildcard due to potential tariffs and immigration changes and their impact on inflation, while fiscal policy and its impact on the deficit is driving term premium higher. Put it all together and the bottom line is that predicting the path of short term and longer-term rates is even more difficult than usual, so staying a bit more neutral or trading a range makes sense. We have also recently added to our rate hedge to protect against a larger move higher in rates. Our conviction in getting our credit work correct is always high, and we will continue to win with that…
Corporate Bond Market Commentary
- IG spreads tightened 1bp to +81bp and total returns were +0.51%.
- Fund flows were +$2.231 billion.
- New issue supply was $23.2 billion.
- HY spreads tightened 5bp to +267bp and total returns were +0.47% (BBs +0.50%, Bs +0.48%, CCCs +0.37%)/
- Fund flows were +$292 million.
- New issue supply was $5.13 billion.
Our take: Solid returns last week have given way to rising rates and a small bleeding of returns this week. Most of the new issuance is done, with perhaps a few remaining stragglers after today. The light supply calendar over the next few weeks should have those people who are indeed working picking through secondary markets to deploy cash in advance of the typical January effect. Where we go from there will depend on rates, earnings, policy, and the inevitable things that no one sees coming. We will certainly be paying attention to how the holiday shopping season plays out for signs of consumer spending resiliency or lack thereof. All-in yields are pretty compelling, even though credit spreads are not. 2025 is shaping up to be a carry plus/minus type of return year, so adding alpha through trading new issuance, identifying catalyst-driven trades (especially in a more robust M&A environment), and avoiding train wrecks will all be in our tool belt for a profitable new year.
Municipal Bond Market Commentary
- The week ending December 6 saw a small rally across the curve. AAA muni yields were down 5, 5, 5, and 6 bp at 2, 5, 10 and 30 years while US Treasury yields were down 5, 1, 2, and 2 bp at 2, 5, 10 and 30 years.
- AAA Muni/Treasury ratios were unchanged at 2 years and down 1% at 5, 10 and 30 years to end the week at 62%, 63%, 67% and 80%. AA Muni/AA Corporate ratios were down 2% at 2 years and down 1% at 5, 10 and 30 years to end the week at 62%, 61%, 63% and 75% at 2, 5, 10 and 30 years.
- For the period ending December 4 municipal bond funds had inflows of $1.15 billion, marking 23 consecutive weeks of inflows.
- New issue is expected to be around $9.4 billion this week.
Our take: It was a relatively slow week for economic data with nonfarm payrolls being the primary focus, and it’s been some time since the nonfarm payroll numbers have had so little market impact. We’ve entered the quiet period prior to the December FOMC meeting with the market currently putting a 98% probability of a 25 bp cut in the Federal Funds rate. Potential impacts of the coming Trump administration continue to be analyzed as cabinet picks meet with congressional leaders in preparation for confirmation hearings. Municipal bond relative value technicals continue to be strong with digestible issuance and strong recent fund flows.
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