After four days of strength in rates markets following the previous Friday’s mediocre employment report, Treasuries retraced about half of the move lower by the end of last week. The mid-week CPI and PPI reports came in below expectations, suggesting that inflationary pressures have not yet materialized. Equities pushed higher before experiencing volatility on Friday and closing slightly lower but still above the 6000 threshold on the S&P 500. Market participants were reminded that geopolitical risks remain a significant threat to global stability as the Israeli attack on Iran threatens the already tenuous stability in the Mid-East. Oil prices jumped as the news of the airstrikes against Iran unfolded. The market’s response to the jump indicated a concern about a meaningful inflationary impact from the jump in oil prices. Not to be ignored, U. of Michigan Consumer Sentiment expectations showed the first uptick in 4 months, coming in at 60.5 and notably exceeding the survey of 53.6. Prior to this, it had reached one of the lowest readings in history; therefore, this increase can be considered a bounce from a very low level as a sigh of relief from consumers. Furthermore, there was plenty of concern by respondents that there remains “wide-ranging downside risks to the economy,” per the survey’s director.
The Fed’s difficult job of balancing their dual mandates for price stability and full employment remain in direct conflict and did not get any easier last week. Softer employment data and a slight decrease in inflationary data over the course of the week led to greater expectations of a Fed rate cut this year. The looming challenges presented by the trade war and tariffs out of Washington, however, continue to threaten inflationary pressures down the road. The Fed is largely expected to remain on hold this week with its pending FOMC Rate Decision. Prior to the current blackout period for Fed chatter, most of the commentary from FOMC governors involved concerns about inflationary pressures, suggesting that they had been leaning towards a more hawkish tone prior to last week. We also look forward to the quarterly release of the Summary of Economic Projections (SEP, aka the Dot-Plot) from the Fed to provide additional clues to the atmosphere within the Fed.
I continue to remain skeptical that 2 cuts are on order for 2025. I expect inflationary pressures and supply chain issues to begin to affect prices as tariff impacts linger. Trade talks, especially with China, continue to make headlines. But the subtleties and nuances of a complicated trade scenario are not something that can be easily resolved. I expect several more months of back-and-forth between negotiators. As a result, the ensuing uncertainty regarding a resolution threatens to undermine consumer comfort and will invariably lead to a resumption of inflationary pressures. Furthermore, I expect the market to revisit the highs experienced earlier this year with 10-Yr Treasuries reaching 4.80% and 5.15% for 30-Yr Treasuries.
From the Municipal Desk (with contributions from Ryan Riffe):
Despite volatility in Treasuries, before Thursday's 2 - 3 basis point move lower in yield for municipals, one would have had to go back a week to June 5 to find any change in the AAA MMD scale. The market had five consecutive days with no scale changes, which occurred in the midst of a heavy slate of new issue supply. In this same time frame, the 10-Yr US Treasury drifted from a 4.50% to a 4.35%, cheapening the 10-YR Muni/UST ratio to a very attractive 76.7%. Demand appears to derive from a well-diversified source of buyers, which helped the market absorb the significantly higher supply in recent weeks. Municipal funds, ETFs, SMA accounts, and traditional retail buyers have participated with consistent demand across the curve. As we look ahead, the new issue calendar takes a slight breather with markets closed on Thursday for Juneteenth. The calendar is only comprised of around $4.7 billion of new issue supply this week (down from as high as $19 billion in the prior weeks). We believe municipals should continue to perform well given the lighter supply, positive fund flows, and attractive ratio levels. In addition, June reinvestment capital continues to be put to work with another push from July redemptions just around the corner.
Treasury Ratios:
3-Yr Ratio 68%
5-Yr Ratio 69%
10-Yr Ratio 75%
30-Yr Ratio 93%
30-Day Visible Supply @ $13.3 Billion
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