Market Commentary: Week of August 19, 2024

Some meaningful and much anticipated economic data was released and factored into the market last week, most notably CPI, PPI, and Retail Sales. The combined message from PPI and CPI, edging slightly lower towards the Fed’s 2% target, lent credence to the expectation that the Fed’s expected 25 basis point cut would come to fruition. Furthermore, it significantly reduced the hysteria regarding an intra-meeting cut or called for a larger 50 basis point cut in September. The disinflationary nature of this data also helps shift the focus upon the importance of the Fed’s employment mandate. Given the slight downtick in initial jobless claims, rates ticked slightly higher on Thursday as a stronger labor market counters the above disinflationary narrative. Retail sales rose, but higher readings were heavily concentrated in auto sales and gasoline. Discretionary spending, on the other hand, appears to suggest a more cautious consumer. Accordingly, the market has settled into trading between 3.80% and 4.00% on 10-year Treasuries.

As evidenced in the above chart, Treasuries have consolidated just below the previous trend channel after testing and supporting the 3.79% previous low. The long-term narrative of lower rates and Fed rate cuts should continue to be respected, and we encourage buying pullbacks for investors seeking to lock in higher yields. Furthermore, given the volatile nature of the market rally beginning on July 31^st, a test of levels around 4.15% would not be unprecedented.

Looking ahead, the market will anxiously await Jackson Hole and any clues from Chair Powell about the looming Fed meeting in September. I don’t expect much to be divulged except a more dovish tone regarding the potential for rate cuts at the next meeting. However, it is unlikely he will provide any context for the size of the cut – but 25 basis points is widely anticipated to be the next move. Guidance will likely continue to focus on the data-dependent nature of the Fed’s process, and flexibility regarding additional cuts is important to be maintained. Notably, prior to CPI, Bostic (historically one of the more dovish committee members) stated, “I want to see a little more data.” Following the downtick in CPI on Wednesday, he indicated, “I’m open to something happening” regarding a September rate cut. Though a more dovish tilt is not unexpected from Bostic, the suggestion that the data was meaningful enough that he vocalized a more accommodative stance is noteworthy.

Municipals have retrenched into the typical summer slowdown mode, with a plethora of vacations taking place towards the last few weeks in August. SWBC clients, however, continue to suggest they have investment needs that must be met but are hoping for a better entry point following the early August grab-fest that aggressively pushed yields lower. Supply is meaningfully above average this week, with around $11.75 billion coming to market. With ratios trending towards the higher end of the summer long-range – 70% in 10’s and 86% in 30’s – opportunity may be available for the portfolio managers in their seats. The market arguably got over-extended, so a little consolidation and patience may offer investors the opportunity to capture better levels. Keep in mind the traditional cyclical nature of the market as we move through the September/October period when municipal underperformance is a common theme.

An index is unmanaged and not available for direct investment. Definitions sourced from Bloomberg.

The Bloomberg Barclays Global Aggregate Negative Yielding Debt Market Value Index represents the portion of the Bloomberg Barclays Global Aggregate Index that measures the aggregate value of global debt with a negative yield. • The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities and serves as the foundation for a wide range of investment products. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization. • The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.• The Cboe Volatility Index® (VIX) is a calculation designed to produce a measure of constant, 30-day expected volatility of the US stock market, derived from real-time, mid-quote prices of weekly S&P 500® Index (SPX) call and put options with a range of 23 to 37 days to expiration.• The ICE BofA MOVE Index is a yield curve weighted index of the normalized implied volatility on 1-month Treasury options. It is the weighted average of implied volatilities on the CT2 (Current 2 Year Government Note), CT5 (Current 5 Year Government Note), CT10 (Current 10 Year Government Note), and CT30 (Current 30 Year Government Note), with weights 0.2/0.2/0.4/0.2 respectively.• The Markit CDX North America Investment Grade Index is composed of 125 equally weighted credit default swaps on investment grade entities, distributed among 6 sub-indices: High Volatility, Consumer, Energy, Financial, Industrial, and Technology, Media & Tele-communications. Markit CDX indices roll every 6 months in March & September. • The Markit CDX North America High Yield Index is composed of 100 non-investment grade entities, distributed among 2 sub-indices: B, BB. All entities are domiciled in North America. Markit CDX indices roll every 6 months in March & September. • The U.S. Dollar Index (USDX) indicates the general international value of the USD. The USDX does this by averaging the exchange rates between the USD and major world currencies. Intercontinental Exchange (ICE) US computes this by using the rates supplied by some 500 banks.

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