Interest rates were pushed higher by Friday to close 10-year Treasuries around the 4.39% level, up from the prior week’s close near 4.25%. Meaningful supply with the 2-year, 5-year, and 7-year auctions offered one potential opportunity for rates to drift upward, which was effectively accomplished by the end of the week. Initial Jobless Claims released on Thursday morning included a meaningful revision to the prior data to 239k, thus providing a brief respite from the higher move as data suggested employment challenges remain a hurdle for the economy. The two other most meaningful market-influencing events on the calendar included the Presidential Debate on Thursday evening and the release of Core PCE (the Fed’s preferred inflation measure) early Friday. The debate arguably increased the odds of a Trump victory, whereas it exposed some weaknesses for the Biden campaign. The constructive Core PCE data indicating further progress in the Fed’s inflation-fighting initiatives was initially met with a rally in rates. As the day progressed, however, rates demonstrated the most pronounced move of the week, rising from 4.26% after PCE to close at 4.39%. Month-end rebalancing, Fed-speak reiterating the continued need to be diligent in fighting inflation, forex concerns with a strong dollar, and concerns about the upcoming French election uncertainty all contributed to the weakness through the remainder of the day.
This week, we are again faced with a holiday-interrupted trading environment with the July 4th holiday on Thursday, but an open market on Friday with Nonfarm payrolls is to be released at 8:30 in the morning. Consensus suggests a +188k increase in the payrolls data, representing a rather benign reading if it were to come close to the survey. If history is any guide, with an expected limited trader attendance on Friday, the market may have a more reactive response after having the chance to digest the data (and some hotdogs) once trading resumes on Monday. The chart below indicates that 10-year rates are firmly in the middle of the current downward-sloping trend channel (light blue) after breaking below the previous upward-sloping channel (red). Additionally, this places rates squarely in the middle of the nearest support and resistance levels. The next move outside the downward channel and/or the support/resistance levels should be closely watched. All things being equal, I continue to favor buying any move near the upper resistance with an expectation that the downward trend will remain intact.
Last week, SWBC client activity in the municipal market increased as rates drifted higher towards the end of the week. Buyers appear to be less willing to chase rates lower but were notably involved as rates backed up. This buying on weakness and indication of support adds a level of comfort to my expectation for an underlying layer of sponsorship to the broader market. This week, the municipal market will have a very limited supply as issuers typically take a breather on issuing new paper during holiday-shortened weeks. Continued need to reinvest redemption proceeds in July (the third highest redemption month of the year, behind June and August) suggests ongoing support for tax-exempt paper over the next several weeks.
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