Weekly Fixed Income Commentary (August 8, 2024)
Economic Commentary
- The unemployment rate rose two tenths to 4.3%, payrolls grew only 114k, and downward revisions to the previous two months’ data brought the level of employment even lower.
Nonfarm payrolls rose just 114k in July. May and June were revised down 29k, May by 22k to 216k and June by 7k to 179k. Revisions have been pretty consistently downward lately. May was originally reported as 272k, 56k higher than where it ended up. - The unemployment rate rose two-tenths from 4.1% to 4.3%.
- Private service producers added 72k workers, including 57k in health and education, 23k in leisure and hospitality, and 22k in trade and transportation. There were job losses in information processing, which cut another 20k workers; in financial services, down 4k; and in temporary help services, down 9k. Weak temp hiring is a recession red flag, though like all recession indicators, it can be a false signal.
- Average hourly earnings rose 0.2%, pulling the year-on-year rate down from 3.8% to 3.6%.
- The average workweek fell 0.3% to 34.2 hours. The manufacturing workweek fell 0.5% to 39.9 hours. Aggregate hours worked fell 0.3%, suggesting a very weak start to Q3 GDP.
- The ISM Manufacturing Index fell from 48.5 to 46.8 in July, missing the consensus estimate of 48.8 by two points. Employment fell nearly 6 points from 49.3 to 43.4.
- The ISM Services Index rose to 51.4, a bit better than the 51.0 consensus forecast. The new orders index bounced from 47.3 to 52.4 and business activity rose from 49.6 to 54.5.
- Revolving credit fell $1.7 billion and has been sideways since February, perhaps foreshadowing weaker consumer spending power ahead.
- Chicago Fed President Austan Goolsbee, speaking yesterday for the second time since the FOMC silent period ended, emphasized yet again that the Fed is not going to overreact to just one month of bad labor market data.
Our take: The labor market is slowing on many fronts – jobs added, hours worked, average hourly earnings, unit labor costs, temporary hiring are all cooling. Labor is also thought to be a lagging indicator, perhaps even more so coming out of a pandemic recovery where employers were loath to lay off workers given how hard they were to hire in the first place. We have been consistent in thinking the Fed would err on the side of waiting too long to cut, fearing that if inflation became entrenched it would be painful to conquer. And while we do believe the Fed has waited a bit too long and a 25bp cut in September is a lock, suggestions of either a 50bp cut or an intra-meeting emergency cut are a bridge too far. Austin Goolsbee has been perhaps the most dovish FOMC participant as of late, so his comments should be read as a clear sign that the Fed does not share the same sense of urgency that some market participants have, and the upward move in rates since his comments are at least partially attributable to that realization. That said, given the round-trip in yields over the last 5 trading days, it has given investors another bite at the apple to move assets from cash/T-bills/money market funds into longer duration bonds.
Corporate Bond Market Commentary
- On Wednesday:
- The IG market held up despite 19 deals / $32 billion of IG new issues.
- On Monday:
- CCC’s suffered their worst loss in two years, down 1.25% and yields of 12.92% reached a seven-month high. Many bonds were down 2-4 points.
- BB bonds were down -0.43% for the day, spreads at +240 reached an eight-month high, and yields of 6.48% were a four-week high.
- Last week:
- IG spreads were 11bp wider to +106 but much lower UST yields drove total returns +2.07%
- Fund flows were strong again at $1.383 billion.
- $31.3 billion of new issues priced.
- HY spreads were 62bp wider to +372bp and total returns were -0.12%.
- Fund flows moderated to +$541% million.
- $9.25 billion of new issues priced.
Our take: : IG and HY spreads have retraced around half of the spread widening since last Friday’s weak payrolls report, while 10yr UST yields have come full circle back to ~4% from the lows of Monday around 3.67%. Total returns over the period are negative for both IG and HY. The confluence of a fundamentally slowing economy and whipsawing technical factors from forced selling and the unwinding of the Yen carry trade have triggered volatility. Eventually, fundamentals will win-out as more data points on the slowing economy and their impact on slowing corporate earnings should push UST yields lower and spreads on lower-quality fixed income wider. We continue to advocate an up in quality / longer in duration positioning and believe total returns for high quality bonds will be double-digit equity-like returns over the next 6-12 months.
Municipal Bond Market Commentary
- The week ending August 2 saw substantial rallies in both US Treasuries and municipals behind weaker economic numbers and revised expectations for the Fed’s interest rate cut timeline. AAA muni yields were down 18 bps at 2, 5, 10 and 30 years. The AAA municipal bond curve underperformed US Treasuries, with US Treasury yields falling 50, 46, 40, and 35 bps at 2, 5, 10 and 30 years.
- AAA Muni/Treasury ratios rose 4% at 2 and 5 years and 3% at 10 and 30 years to end the week at 68%, 72%, 69% and 86%. AA Muni/AA Corporate ratios rose 1% at 2 and 30 years and remained flat at 5 and 10 years to end the week at 64%, 65%, 63% and 78% at 2, 5, 10 and 30 years.
- For the period ending July 31 municipal bond funds had inflows of $1.1 billion, $244 million to open-end funds and $868 to ETFs.
- The muni new issue calendar is expected to be around $16.1 billion.
Our take: It’s not unusual for the municipal market to lag US Treasuries when the yield curve moves rapidly, and the recent underperformance will likely lead to near term municipal market outperformance. The heavy new issue calendar may be a temporary drag, but over the medium-term municipal bonds should catch-up.
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