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
|
4 min read
The market drifted higher for much of the week on relatively lighter volume due to the Labor Day Holiday weekend. 10-Year US Treasury rates steadily climbed upwards, closing the week at 3.90%. The shifting of attention from participants away from inflation and towards the employment picture was further reinforced this past week. Core-PCE, the Fed’s preferred inflation gauge, clocked in at an unrounded +0.16%, adjusting the 3-month annualized rate to 1.7% -- down 0.3% from June’s 3-month average. Presently, this should not provide fuel to calls for a more aggressive 50 bps cut to the Fed Funds target rate in September, but reinforces that a cut is anticipated.
This week, we receive more intel regarding the all-important employment picture with Nonfarm Payrolls to be released on Friday – consensus calls for a modest 165k gain, improving upon the prior 114k gain. A slower pace of hiring coupled with the recent -818k revision to employment data may trigger a more robust response from the market. Notably, Chair Powell has effectively positioned the Fed to a cut at the September meeting and stated that they do not desire to see further cooling in the labor market. Inflation data appears to offer more solace to the market (and the Fed) that the path towards disinflation continues to move forward albeit at a slower pace than most would prefer, thus the increased scrutiny upon BLS data. Given that rates have drifted away from the recent lows and strong support near 3.80% in the 10s (red line), higher yields should incentivize investors to lock in better levels ahead of a potential start to a Fed rate-cutting cycle.
Municipal investors were quieter last week and will probably remain so this week with the holiday-shortened trading period and the employment release on Friday. The bigger picture remains, however, that fund flows remain strong ( over $1 billion added last week), and investor cash continues to seek a home at attractive levels. Supply and demand influences will be critical as we head through the month. Any meaningful decline in new issue supply will likely hold municipal rates steady relative to Treasuries, given the strong demand component within the market. Analysts have recently pointed out a poor performance dynamic the market has endured over the past decade in September. I wouldn’t expect this month to experience the same performance challenges. Still, October could offer some speedbumps ahead of the Presidential election as investors have historically pulled back on committing as election day approaches. Thus, fixed-income investors may be well-served to be strong buyers should 10-year Treasuries offer an opportunity between 4.00% and 4.10% (blue box). I’ve been a strong proponent of buying dips over the past four months, and my conviction remains solid in this regard, especially with the improving inflation picture that has emerged over the summer.
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.