Market Commentary: Week of July 22, 2024

Another weekend, another tumultuous (though not completely unexpected) political development with Biden relinquishing his candidacy and endorsing Vice President Kamala Harris. As of this draft, early morning Monday, July 22, the Trump Trade appears to have hit the pause button. Essentially, in rates markets, this involves a curve-steepening trade, where the long-end rises to a greater degree than the short-end, and suggests the market is pricing in a term premium based upon Trump’s fiscal and trade policies, spurring economic growth and reigniting inflation. Though having already reversed course, Treasuries had previously reacted with 30-year rates eclipsing 2-year rates for the first time since January. Prior to this announcement, the assassination attempt on Trump arguably increased the odds of a Republican victory in November at the polls. This latest wrinkle in the political landscape, however, introduces new uncertainties and questions for the markets to digest. Safe haven assets, such as the Swiss franc, US Treasuries, and gold, have all bumped higher in reaction to the new dynamic surrounding the Democratic Presidential candidacy. Regardless, we can expect increased volatility as the market factors in the political uncertainty and turmoil with more volatile price moves.

In terms of economic data, last week’s focus on Thursday’s CPI release did not disappoint as the market rallied to test and close at the 4.18% support level in 10-year UST (U.S. Treasury). The disinflation narrative has clearly taken center stage as odds for a September cut by the Fed reached 95%. Friday’s PPI release, though stronger than expected, did little to meaningfully reverse the bold move following CPI. Keep in mind that Fed policy has the greatest effect on the front end of the curve. Notably, expectations for the Fed to cut the Fed Funds target rate reinforce the steepening bias mentioned above, pulling the front end of the curve lower. Though rates have universally decreased since the peak reached in early April, increased volatility should be expected over the next several months as the market digests economic data and ongoing political uncertainty.

The above chart indicates the declining trend channel (yellow lines) in rates that continue to test support levels. The pattern of lower highs and lower lows, with consistently breached support levels, offers evidence that the market is buying the lower inflation narrative. Given expectations for Powell and Co. to cut the target Fed Funds rate, it appears that the next level of support around 4.08% (pink line) is the next line of demarcation below the market that will be tested. Rates could get choppy as we head closer to the election. However, the economic data is the current focus of market participants, driving the narrative for lower yields in the immediate future. Pullbacks should be respected but should ultimately provide buying opportunities for nimble investors.

SWBC clients continued to look for opportunities to put cash to work last week, with an incredibly robust flurry of activity occurring on Thursday as the market rallied. Heavy redemption monies in the municipal market for July resumed their search for a reinvestment home as the light July 4^th calendar week limited new issues early in the month. Though supply has resumed the heady pace it had enjoyed throughout much of the past several months, demand continues to outpace supply. Specialty state paper remains a particular focus as investors indicate they are having a harder time finding paper at levels with which they wish to transact.

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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