Market Commentary: Week of June 17, 2024

The market’s approach to the recent economic data appears to be ahead of the Fed’s perspective on inflation and the path toward lower interest rates. Last week, both CPI and PPI demonstrated meaningful declines, suggesting moderation in the previously sticky outlook on inflation. As a result, 10-year US Treasuries rallied, with rates dropping precipitously. Contrarily, as expected, the Fed held rates steady last Wednesday, but with a more hawkish tone in Chair Powell’s comments. Notably, the economy's steady growth provides the Fed some cover, as demonstrated by the median projection for rate cuts, which dropped to only a single 25 basis point reduction this year. Recall the Fed’s steadfast and mistaken adherence to their stable rate policy and a “transitory” inflation narrative in 2021, with the market (including yours truly) clamoring for action in hiking rates. The current scenario is arguably different as the Fed is simply more cautious in its policy stance (instead of being outright wrong) as opposed to the market’s more aggressive approach.

The path towards lower interest rates appears more clearly defined than at any point this year. After a challenging first quarter, with economic indicators suggesting that inflation was not meaningfully tamed, more recent data has provided a more disinflationary forecast. Additionally, technical factors in the benchmark 10-year US Treasury market have added some conviction to this sentiment. Activity since the April peak has indicated that the path towards lower rates may be well established. First, rates have demonstrated lower lows and lower highs over the past two months (green swing line). Second, the upward-sloping trend channel (white lines) has been decisively breached to the downside. Third, the 50% retracement/support level (Blue line) of the move from the December low to April high has been broken to the downside. Looking ahead, though still offering support thus far, keep a close eye on the 4.19% level (red line), as the next stop below is nearly at the 4% barrier. Given the above fundamental and technical analysis, the interest rate high for the year was reached in April at 4.73%. Rates may bounce around, given the volatile nature of the market. However, any higher rates (particularly above the 4.50% level) can comfortably be viewed as a buying opportunity for investors to lock in yields with less risk of a sell-off hurting performance.

This past week, customers were active in buying bonds as the municipal market rallied in line with Treasuries. Desk turnover of the balance sheet was robust, though not overly active. Next week presents an awkwardly divided work week, with the Juneteenth market closing on Wednesday, bifurcating the working days. I would not be surprised if some consolidation and a quieter market environment occurred. Unsurprisingly, one less day in the week leads to a lighter new issue municipal calendar with only a slightly below average $7.5 billion coming to market. With the rally, municipal ratios have retraced from the previous 70% area, offering slightly less relative value. I expect a resumption of the heavier weekly calendar to resume in the following weeks, again providing investors a chance to more easily put cash to work at slightly higher rates than where last week closed.

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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