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.
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