The calm after the storm — kind of. This past week CPI and PPI data showed slight upticks keeping the Powell & Co narrative for a 25-basis point cut to the December meeting in play. As of end-of-d...
Capital Markets
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4 min read
Along with the 4th of July fireworks breaking up the trading week, the market found its own reason to celebrate with a strong bid underlying interest rate markets. Recent economic data suggests a continued cooling of the US economy and that the Fed has edged slightly closer to finally needing to undertake its first rate cut. Notably, ISM Manufacturing and Services data came in below expectations and, more importantly, below the key level of 50. Additionally, JOLTS Job Openings data for May was significantly higher than survey results. Finally, Friday’s Nonfarm Payroll and Unemployment data added fuel to the fire involving market expectations for a cut by the Fed at the September meeting. As of this writing, the market is pricing in a 76% chance for the Fed to cut the target Fed Funds rate at the September 18th meeting.
This week, all eyes and ears will focus on Powell’s address to Congress and any hints regarding the Fed’s policy path. Then, on Thursday, the always-important CPI data will be released, with expectations for a 0.1% increase in June, but a continued move lower to 3.1% on a YOY basis. The uncertainty overhanging the US political process regarding President Biden and louder calls for him to step down from his election campaign may add another layer of complexity to the broader markets. Following his poor performance on the debate stage, the Treasury market sold off significantly - pricing in an increased likelihood for a Trump election win and the higher growth prospects for the economy because of his anticipated policies.
The above chart highlights the recent volatility to the rates market as conflicting forces have pushed and pulled yields in different directions. Despite this, rates remain contained within their recent channel, and the bias remains toward lower rates. We continue to call for opportunistically putting cash to work on pullbacks in rates based upon the expectation that the high for the current cycle is already in place and lower rates are on the horizon.
Last week, SWBC clients were fairly active despite the holiday-interrupted trading days. The combination of the aforementioned spike in rates following the Presidential Debate and heavy reinvestment cash hitting client accounts provided a reasonable incentive for investors to buy bonds. Last week, the limited new issue supply led to a focus on secondary positions and a decline in dealer balance sheets. This week, with over $9 billion in deals slated for pricing, we are back to an above-average supply environment. Still, expectations for continued strength in demand should maintain a solid bid underlying the market.
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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