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...
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-day Friday, however, the probability of a December cut had slid to 58%. Given the timing of the next meeting on December 18th, we will receive another round of economic data in terms of Nonfarm Payrolls, Unemployment, PPI, and CPI prior to the announcement which may add some clarity to the picture. On the other hand, we will only have the benefit of a single core-PCE data point (the Fed’s preferred inflation gauge) prior to the meeting.
Powell’s comments on Thursday planted the seeds for a slower pace for Fed rate cuts with his language about not needing to be in a hurry to lower rates. He elaborated that the Fed may slow the pace of cuts to increase chances of getting it right. Other Fed officials, namely Kugler and Barkin (both voters), added doubt to the pace of cuts with their couched comments about the consideration for a pause, as well as uncertainty regarding the strength of the labor market.
After the wild 2-day volatility immediately following the election, interest rates generally continued their upward ascent. Notably, 10-Yr rates briefly tipped the scale above the 4.50% level before settling back below an important resistance level at 4.47%. With that being said, I expect rates to continue to push higher and eventually test the April high at 4.73% before year-end.
SWBC client activity picked up last week, as expected with the uncertainty of the election behind us. One SWBC trader stated that the municipal market “stiff-armed its way through the whole week.” With lighter than usual supply and a holiday-shortened week, demand for paper was robust even with ratios below 68% on 10-year paper, and at the lowest levels this year at 81% on the long-end. Customers seeking liquidity was on full display with meaningfully large bid lists each day. Notably, much of these lists traded with meaningful “going-away” orders. Negotiated deals were over-subscribed for 3-to-15+ times with the heaviest demand beyond 20 years. Long-end 5% coupons and discount 4% coupons received the most attention. Buyers clearly have plenty of cash on the sidelines and are willing to buy long-duration to lock in attractive yields.
Looking forward, the new issue municipal calendar is scheduled to barely exceed $8 billion this week. Though lighter than the weeks leading up to the election, this represents a reasonably decent week of supply. As mentioned previously, the pent-up demand should solidly absorb this issuance keeping ratios tight and opportunities to grab paper somewhat constrained.
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.
Investing involves certain risks, including possible loss of principal. You should understand and carefully consider a strategy’s objectives, risks, fees, expenses, and other information before investing. The views expressed in this commentary are subject to change and are not intended to be a recommendation or investment advice. Such views do not take into account the individual financial circumstances or objectives of any investor that receives them. All indices are unmanaged and are not available for direct investment. Indices do not incur costs including the payment of transaction costs, fees, and other expenses. This information should not be considered a solicitation or an offer to provide any service in any jurisdiction where it would be unlawful to do so under the laws of that jurisdiction. Past performance is no guarantee of future results.
© 2021 SWBC. All rights reserved. Securities offered through SWBC Investment Services, LLC, a registered broker/dealer. Member FINRA & SIPC. Advisory services offered through SWBC Investment Company, a Registered Investment Advisor, registered as such with the US Securities & Exchange Commission. SWBC Investment Services, LLC is under separate ownership from any other named entity. SWBC Investment Services, LLC a division of SWBC, is a nationwide partnership of advisor.
Let Us Know What You Thought about this Post.
Put your Comment Below.