Volatility was on full display this week as rates tested new cycle highs after the Trump election victory. On Thursday, the FOMC rate decision was announced calling for a 25-basis point cut followed b...
Capital Markets
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We received a monster employment release just in time for the Halloween season. Friday’s Nonfarm payroll data came in at 254k jobs created as compared to the survey of 150k. Notably, this beat economists' 220k range high estimate by a meaningful margin. This is in stark contrast to the August data showing a meager 118k rise in payrolls. Furthermore, the Two-Month Payroll Net Revision came in at 72k. Finally, the Unemployment Rate also ticked down to 4.1% from last month’s 4.2%. The unrounded figure narrowly avoided being rounded even lower to 4.0%. In hindsight, the Fed’s recent shift focusing on the employment picture, citing the Beige Book data as justification, is a bit of a head-scratcher with the new data in hand. Regardless, this arguably diminishes the likelihood of a 50 bp cut at the next Fed meeting in November and keeps the Fed on a steady 25 basis point path for each meeting in November and December.
The above chart highlights the sharp upward move in rates following Friday’s surprise employment data. Rates shot well above the 50-day simple moving average (pink), tested nearby support at 3.98% (red), and pushed above the upper trend channel (yellow). Once the dust clears, I expect the shaded oval to represent a good buying opportunity for fixed-income investors. Notably, the major support of around 4.16% also represents a 50% Fibonacci retracement from the April high.
The price of oil continues to climb as overseas tensions show little sign of abating. Clearly, this is something we should pay attention to as this could influence the future inflation picture. Additionally, the economy dodged a bullet with the end of the strike at the ports, which could have had a crippling effect on the path forward should it have lasted for an extended period of time. Concerns about supply chain problems and resulting inflationary impacts are no longer making headlines from this unexpected threat.
Despite being a typically challenging month for municipals, September posted a decade-best monthly performance figure with a 0.99% return. I have cautioned in previous Commentaries that performance during the September/October period has historically been a challenge for the market. Though it is early in the month, October is already showing some signs of weaker performance in sympathy with the rising rate environment for the broader market. With the pending election and slower market activity, I would not be surprised if the market took a break from the heady pace from the prior month. Supply has slightly diminished in recent weeks, with smaller total issuance than we experienced through the summer months. Demand continues to remain strong, with over $ 1.3 million in fund flows representing the 8th straight week of inflows. I continue to view any pullback in rates as a buying opportunity.
Municipal activity was somewhat muted for the week ahead of the NFP data release. The fallout from the damage resulting from Hurricane Helene remains to be seen, but clearly, the pictures of the devastation are heart-wrenching, with entire small towns seemingly wiped off the map. Early estimates place damage totals in excess of $150 billion. Historically speaking, credit implications for issuers have been minimal in the past, however, concerns about GO debt resilience in the wake of such devastation should be considered. We witnessed very limited knee-jerk reactions from bondholders seeking liquidity this past week. Such efforts usually do not work out well for sellers, so a more restrained reaction is a market positive.
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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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