Expectations were virtually sealed this past week for the Fed to cut its target rate by 25 basis points on Wednesday afternoon. Economic data supported this narrative but raised the specter of more pe...
Capital Markets
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4 min read
Last week interest rates largely followed the expected path from a technical perspective. Recall the week prior, 10-Yr UST pushed above a relevant resistance level just below 4%. Along with a handful of other meaningful technical and fundamental reasons, the expectation was (and remains) for 10s to test higher yields before heading lower again. A key near-term target remains the 4.16-4.20% area, which is expected to be touched in the near future.
Inflation data hit a small speed bump, with core-CPI coming in slightly higher at 0.3% MoM, and the YoY pace increased by 0.1% to 3.3%. As expected, PPI data was slightly more mixed with MoM core-PPI at 0.2%, but YoY data increased from 0.2% to 2.8%. This uptick arguably added a little fuel to the fire for rates to continue to ascend this past week. However, one month’s worth of data does not signify a trend. This sentiment was voiced by Fed Governor Williams’ statement, “Month to month, there’s wiggles and bumps in the data, but we’ve seen this pretty steady process of inflation moving <downward>… I expect that to continue.”
It’s been a few weeks since I referenced the upward slope of the Treasury curve. As the above chart indicates, following the longest inversion in history, the 2’s-10’s curve has maintained its upward slope despite revisiting the zero boundary (red line) briefly in the past two weeks. This ebb and flow is expected, but with the Fed telegraphing its long-term intentions, further steepening should be expected. Furthermore, I expect the front end of the curve to continue to move lower and extend the gap between 2’s and 10s as the Fed’s rate-cutting cycle persists. I reiterate my support for locking in attractive yields in the intermediate portion of the curve, especially with 10-year Treasuries above 4%.
Expectations for November’s Federal Reserve meeting continue to support a 25-basis-point cut, with an additional 25-basis-point cut at the December meeting. The most recent inflation and employment data have reduced the likelihood of a 50-basis-point cut in November and can arguably bring a pause into play. With more data pending prior to the meeting (especially PCE and employment data), the narrative can shift should the data suggest a change to the current sentiment.
With rates continuing to migrate upwards, SWBC clients were more selective in adding paper to portfolios over the past week. Flows were arguably lighter than average, but the right structure remained well-bid and showed signs of activity. Taxable municipal activity was notably weaker, which was unexpected as the value proposition with cheaper Treasury prices typically suggests better opportunities for buyers. Perhaps Hurricane Milton’s impending landfall was a distraction for enough participants as our colleagues in Florida had more important immediate concerns. Despite the holiday-shortened trading week, the new issue of municipal supply is expected to exceed $11 billion following last week’s light $7.8 billion of issuance. Fund flows remain positive, so demand continues to be solid, but activity is expected to slow down around the week of the election. I’m wondering out loud if last week’s slowdown was an early precursor for buyers taking a “wait and see” approach to the election results a little earlier than anticipated. Time will certainly tell.
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