Last week, the market’s initial focus was directed toward the preliminary annual benchmark revisions to US Payrolls between April 2023 and March 2024. The sizeable but in-range revision of -818k dropped the average from 242k to 174k per month, resulting in a bid to Treasuries throughout much of the Wednesday session. Typically, this data point fails to garner significant attention; however, the Fed’s recent suggestions that inflation is subsiding have increased focus on its other mandate of maximum employment. Thursday, the market consolidated towards the middle of the recent trading range ahead of the highly anticipated Powell speech at Jackson Hole. Powell failed to disappoint on Friday with a decidedly dovish tone highlighted by his statement, “The time has come for policy to adjust.” Treasuries reacted by again pushing towards the low end of the recent range, with 10’s closing the week around 3.80%; equities responded with a similar bullish bid, pushing closer to July’s all-time high. Powell was much more coy about the pace of cuts, leaving the market to debate the size of the September cut again, with some pundits calling for 50 bps. Given the Fed’s heretofore cautious approach, I cannot see a larger (50 bps) cut as a reasonable possibility at this point.
As detailed in the above chart, the market is pricing in an implied probability of greater than one cut at the September meeting and over four cuts by the December meeting. Furthermore, it has nearly 200 basis points of cuts priced for the end of 2025. This highlights the difference between the market’s conviction for more aggressive policy action on the part of the Fed as compared to the steadier and reserved approach from Fed officials. It should be noted that the market has been equally wrong and ultimately incorrect throughout much of this year, with expectations in February of nearly five cuts being priced in by next month’s meeting – a prophecy that has obviously failed to occur. Additionally, with 2-Yr Treasuries trading around 3.90% and 10-Yr Treasuries around 3.80%, keep in mind that once the Fed begins to cut, a normalization of the presently inverted yield curve is likely to follow. Investors should be mindful of the pace of the yield curve shift and where anticipated opportunities may arise. I’ve been vocal in suggesting that pull-backs in yield should be considered a buying opportunity. Still, as we get closer to the 3.50% level in 10’s, I find it hard to expect a meaningful push below this level can occur even with the more aggressive market expectations for Fed cuts as compared to actual pace of policy initiatives.
The summer slowdown was apparent over the past week, as holidays and absences contributed to a slightly less active week from SWBC clients. Except for the front end of the municipal curve, the market was much less reactive to the swings in Treasuries throughout the week but did play a little catch-up following Powell’s speech on Friday. Ratios as a percentage of Treasuries remain relatively attractive, with 71% in 10 years and 87% in 30 years. The calendar this week prior to the Labor Day Holiday weekend is expected to be a relatively average week, with around $8.75 billion in supply coming to market. I expect the following week will be much lighter with a Monday market close. The cyclical nature of the municipal market will be tested as we head into the September / October timeframe. October typically produces municipal underperformance, offering astute investors a chance to purchase paper at relatively attractive yields and ratios.
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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