“Good enough for the Fed to stay the course” is how I would characterize Friday’s employment data.
Capital Markets
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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.
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