Anxiety and concern certainly diminished last week, but by no means are we out of the woods yet. All eyes and ears were on Chair Powell on Wednesday. Though, as expected, the Committee followed through with no cut to the Federal Funds Target Rate, maintaining the 4.25 – 4.50% range in place since December. During both prepared remarks and the press conference, Powell stressed the uncertainty that the ongoing trade war continues to inflict upon markets, the economy, and investors. Additionally, he acknowledged that both employment and inflation risks have become more elevated, placing the Fed’s dual mandates of price stability and maximum employment in tension. Notably, the probability of a Fed rate cut at the June meeting plummeted from 90% the week prior to only 20% following Wednesday’s announcement. I remain skeptical that the Fed will cut more than a single time in calendar year 2025, with a small possibility of no rate cuts taking place.
Trade talk headlines continue to keep investors on their toes as the risk-on/risk-off dynamic in equities influences the rates market as we digest the ever-shifting situation on tariffs. The S&P 500 spent much of the week fluctuating between 5600 and 5740 demonstrating resilience despite concerns about the US economy. Treasury yields, on the other hand, drifted slightly higher as inflation concerns remain an ongoing threat.
Furthermore, investors must be careful to understand the subtleties and nuances of any announcements on progress. Initially, news of the US/UK trade deal was received positively, but criticism later developed as some of the trickier issues were not resolved. Constructively, however, such progress bodes well for additional agreements with other trade partners. We are focusing on any developments with China specifically, but true progress will likely take longer to come to fruition. Notably, Chinese trade data for April declined from $102.64 billion to $96.18 billion. Arguably, positive developments with US-China discussions would likely be positively received by the equity market, though such a reaction may be short-lived. Concerns about downstream negative implications for the US economy resulting from tariff impacts have me skeptical that there is meaningful upside potential to the equity markets on a longer-term basis. Furthermore, as time progresses, I expect inflationary pressures to increase and put upward pressure on the rates market. Economists remain divided on the impacts of tariffs on prices, the job market, and the economy, with a broad spectrum of views further highlighting the challenge of forecasting the markets in these volatile times.
From the Municipal Desk (with contributions from Ryan Riffe):
Although the AAA MMD scale showed little change by the end of the week, the municipal market outperformed US Treasuries, tallying up its second consecutive week of strength. Despite a continued robust supply of new issues, negotiated deals were heavily oversubscribed, making it challenging for street accounts to secure desired allotments. Simultaneously, customer bid-wanteds remained light, creating challenges for sourcing bonds in the secondary market to fulfill active inquiries. Even though the 10-Yr municipal to Treasury ratio richened to 75%, indicating relatively less attractive yields, accounts continued to be active buyers. Adding to the positive momentum, the market also recorded its second consecutive week of inflows into municipal bond funds. Looking ahead to this week, the new issue calendar remains heavy at $11.5 billion for tax-exempt supply. Although this represents an increase from last week, the market is expected to continue to absorb new paper given the lack of customer bid-wanteds, steady inflows, and ongoing May reinvestment capital being put to work.
Ratios
3-YR Ratio @ 74%
5-YR Ratio @ 74%
10-YR Ratio @ 75%
30-YR Ratio @ 91%
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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