The news cycle surrounding the ever-developing trade war continues to be the most important criteria influencing financial markets. Economic data seems to be an afterthought as escalation or de-escala...
Capital Markets
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4 min read
The news cycle surrounding the ever-developing trade war continues to be the most important criteria influencing financial markets. Economic data seems to be an afterthought as escalation or de-escalation rhetoric drives price action. Additional headline concerns included the unexpected threats, followed by the eventual retracement of President Trump’s desire to relieve Chair Powell of his post at the FOMC. Regardless of the likelihood, legality, or reality of this coming to pass, such ominous statements undermine the markets and create a sense of unease and uncertainty that fails to instill confidence on the part of the investment community. Since there is little faith that disruptive statements will cease to emanate from Washington, it is more difficult to have conviction regarding the tone or direction of the markets on a day-to-day basis.
Both stocks and bonds began the week with a softer tone that turned decidedly positive as time progressed. President Trump retracting his comments about firing Powell added to the risk-on tone. Additionally, Secretary Bessent’s comments suggesting improvement on the trade war with China, as the current situation is unsustainable, added further fuel to the positive market developments. Though these near-term developments have been constructive to the markets, the bigger issue regarding the impact on the economy of any trade disruptions, let alone a protracted trade war, is a more important long-term concern. Furthermore, recent suggestions that the Fed will likely act with a rate cut at the June meeting make little sense in my opinion. The Fed has been adamant regarding their desire to observe more consistent and sustained evidence suggesting a cut is needed. Continued disruption and uncertainty regarding the path forward due to unsettling statements from President Trump are counterproductive to providing the stability required by the Fed to act to lower rates. Until we have more clarity, I continue to expect a higher for longer rate environment and fewer rate cuts by the Fed as they will be more likely to continue to wait for evidence that a rate cut is unequivocally needed, and inflation is not the primary concern.
The week ahead brings a number of important economic releases. The Fed’s preferred measure of inflation, Personal Consumption Expenditures (PCE), will be followed later in the week with Nonfarm Payrolls data. However, I will be most anxiously awaiting Wednesday’s preliminary estimate for Q1 GDP. In harmony with the broader geo-political narrative, expectations consist of a wide array of predictions, from -2.5% to around +1.5%. The lack of consensus is notably in line with the increased level of uncertainty defining our current economic environment. In the unlikely event that President Trump avoids making disruptive and inflammatory statements, we may be able to observe how the market will interpret the important data that will help drive future Fed decision-making going forward.
From the Municipal Desk (with contributions from Ryan Riffe):
The municipal bond market experienced another volatile week of price action. On Monday and Tuesday, the MMD AAA scale weakened between 10 to 16 basis points at various points along the curve. Later, with risk assets stabilizing and Treasury yields falling, the aforementioned trend in tax-exempts reversed mid-week, leading to 12 to 15 basis points of strength. Encouragingly, the latter half of the week witnessed a good two-way flow, indicating increased underlying demand. In addition, ratios remain at attractive levels for investors. Robust new issue supply, increased customer Bid-Wanteds, fund outflows, rate volatility, and clarity regarding future tariffs have all contributed to the pressure imparted upon the municipal market. As we look ahead, May will bring a meaningful increase in reinvestment capital, which should provide much-needed support. Furthermore, the new issue calendar should continue to normalize from the elevated levels we've experienced so far this year. This, in turn, should shift the imbalance of supply and demand that has cheapened the market for most of March and April.
5-YR Ratio @ 80%
10-YR Ratio @ 80%
30-YR Ratio @ 94%
An index is unmanaged and not available for direct investment. Definitions sourced from Bloomberg.
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