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
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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