A Visit from Chair Powell (a.k.a. ‘Twas the Week Before Christmas) ‘Twas the week before Christmas, when all through the heavens
Last week, interest rates chopped around in a sideways range with a slightly lower yield inclination ahead of the always-important employment data. On Friday morning, Nonfarm Payrolls hit the tape with +227k in jobs gained on the month; a nice rebound from the prior month’s figure with only +12k in gains which was revised to +36k. Contrarily, the Unemployment Rate came in at 4.2%, representing a 0.1% increase over both consensus expectations and October’s data. The Treasury market responded with a show of strength as 2’s dropped below 4.10% and 10’s tested below 4.15%. Though the Unemployment Rate suggests a slight softening in the jobs market, the data provides little to suggest a change in the Fed’s expected path for a final 25 basis point reduction on December 18th.
A recent conversation with a client regarding the shape of the yield curve suggests that it continues to warrant attention as it has flirted with revisiting the inverted shape it maintained for much of the past 2.5 years. As discussed in prior commentaries, such vacillations are to be expected. The trend towards re-steepening, however, should ultimately remain intact — especially as the Fed maintains its effort directed at easing monetary policy. Even if the pace of rate cuts slows down with fewer reductions over the next 12 months, the slope of the curve should remain upward-sloping as long as the bias continues to lean toward cutting instead of raising rates. As the above chart indicates, the spread between the 2-Year and 10-Year US Treasuries has remained positively sloped since disinverting in September. Though it has tested the zero-bound (and may even threaten to invert again at some point) it should ultimately be expected to keep moving higher in the future.
This week, we will receive no hints from the Fed as they have entered their quiet period ahead of the next meeting. CPI and PPI will be released on Wednesday and Thursday, respectively providing the final possible incentive for the Fed to pause instead of cut by 25 basis points the following week. Currently, the probability for a 25 basis point reduction stands at 85%. Core-CPI is expected to come in at 3.3%, flat to the prior month’s reading. PPI, on the other hand, is expected to post a 0.1% increase to 3.3% over last month’s figure. At this point, the Fed’s inclination would require a meaningful divergence from these figures to warrant a change to the anticipated rate reduction outcome.
SWBC municipal investing clients demonstrated a concerted willingness to stay the course regarding efforts to keep putting cash to work. Despite steadier Treasury yields through last Thursday, municipal yields shifted lower on strong demand across the curve. The heavier calendar last week was met with a very strong demand for paper. This week, the new issue calendar is slated for around $10 billion in supply. Though supply is likely to abate during the Christmas holiday week, investors will likely keep their foot on the pedal and continue to seek opportunities to buy. The total supply for 2024 will likely set a new record just below the $500 billion threshold. I expect next year’s calendar to be even higher with between $525 to $550 billion in supply as infrastructure needs will continue to grow.
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