The more things change, the more they stay the same. Last week, there was a mixed bag of data. A July cut is nearly off the table with market expectations suggesting only a 5% chance, and September is...
Market Insights
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The more things change, the more they stay the same. Last week, there was a mixed bag of data. A July cut is nearly off the table with market expectations suggesting only a 5% chance, and September is slightly better than a coin flip with a 59% probability at this point. CPI data mirrored previously released PCE data, indicating still sticky inflation, especially in categories that are more likely to be impacted by higher tariffs. PPI, on the other hand, was more muted, counteracting some of the inflationary indications put forth by CPI the day prior. Retail Sales data was relatively strong, demonstrating the ongoing strength of the US consumer-driven economy. Jobless claims continued to decline for the 5th consecutive week, failing to demonstrate further cooling of the labor market. The net result points to the Fed maintaining its patient approach regarding fiscal policy despite Fed governor Waller making headlines for strongly suggesting that he supports a July cut.
Unsurprisingly, the real fireworks last week came from the White House with renewed headlines that Trump was considering firing Chair Powell. Markets reacted sharply to the news, then quickly retraced following President Trump’s statement that he was not considering such a move. The initial reaction was a decline in equities, a front-end rally in Treasuries, and the long-end selling off. Notably, the 30-Yr rate shot up to 5.07% within 10 basis points of the May high, which peaked at 5.15%. Clearly, the market’s interpretation implies a replacement would likely cut rates, thus lowering yields on the front-end of the curve. Contrarily, the long-end cheapened on concerns that a less independent Fed would undermine the credibility of the Central Bank and its decision-making based upon economic data as opposed to political whims.
Interest rates tested higher levels (near 4.50% on 10-Yr US Treasury and above 5% on 30-Yr US Treasury) last week only to consolidate by Friday’s close back near the middle of the recent trading range. Market volatility remains high, and the unpredictable nature of market-moving impacts makes it increasingly difficult to predict market moves with conviction. That being said, the market’s oversold conditions were worked off, and the prevailing trend continues to suggest that higher rates are the path of least resistance for the intermediate and long-end of the market. I remain skeptical that the Fed will undertake 2 rate cuts this year, as I expect inflationary impacts to begin to present in the economic data at some point in the coming months. Furthermore, with continued strength in the economy and a still decent labor market, the Fed will be hard-pressed to justify cuts. Additionally, the market pricing in additional term premium for longer-term debt continues to place pressure on that sector of the market as the perceived safety of US Treasury debt has come into question.
From the Municipal Desk (with contributions from Ryan Riffe)
The municipal market experienced further steepening this week, which not only persisted but accelerated meaningfully. While the front end remained largely unchanged, the long end experienced a sharp sell-off with yields rising by more than 20 basis points.
Several factors contributed to this move:
-Outflows from municipal bond funds have pressured dealer balance sheets and secondary market liquidity.
-Unclear inflation expectations, which continues to put pressure on the long end of the yield curve, and municipals are not free from this impact
-Headline risk regarding Powell's fallout.
Throughout the week we observed targeted liquidations in specific sectors such as healthcare and higher education. From a structural standpoint, we continue to see a rotation out of short, callable paper into longer, call-protected structures, as investors seek to lock in higher yields. The very long-end of the market, however, remains sparsely attended, keeping ratios high as more limited engagement precludes active participation. Looking ahead, the market faces additional headwinds with next week’s expected supply exceeding $10 billion, which will likely keep pressure on the market. We believe the front end of the curve will continue to outperform relative to the long end until there is greater clarity on inflation, fund flows, and political developments.
Ratios as a Percentage of Treasuries
3-Yr 64%
5-Yr 64%
10-Yr 75%
30-Yr 95%
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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