“Good enough for the Fed to stay the course” is how I would characterize Friday’s employment data. Specifically, Nonfarm Payrolls came in at 142k vs 165k survey, and last month’s data was revised lower to 89k from an already weak 114k figure. The 4.2% (in line with expectations) unemployment rate experienced its first drop in five months. Thus, the data indicates some softening of the labor market but fails to issue a dire warning that the employment picture is cooling at a significantly faster and disconcerting pace. The Fed still has a chance to orchestrate a soft landing; however, the possibility of a more intense recession remains a distinct possibility. At this point, and after hearing some Fed speakers' remarks following the NFP release, I continue to expect the Fed to cut only 25 bps on Sept 18th. A steady and non-reactionary (though reactive to data) Fed will likely not panic adjust as data does not require a change of pace at this point.
Arguably, the rates market had effectively priced in a weaker data scenario with 10’s around 3.70% before the release. Furthermore, its steady pattern of lower yields over the past several months indicates that participants have consistently factored in the weakening data environment. Equities, on the other hand, were still holding hope for stronger data and had to finally acquiesce. S&P futures headed sharply lower and stayed suppressed for the remainder of the session. The above chart highlights this disparity. Perhaps this is the first sign of cracks in the equity market's armor. Notice that since June (when economic data showed signs of weakening and expectations for Fed rate cuts were becoming normalized), 10-year UST rates have fallen around 85 basis points. Contrarily, the S&P 500 Index continued to make new highs during this period and is still 150 points above the early June level of around 5200. If recession fears come to fruition, and the Fed Funds target rate-cutting focus from the officials accelerates, the bond market is already ahead of the stock market in terms of pricing in such a scenario. Equity investors will finally have to concede that bad news is bad news and equity valuations and earnings expectations need a correction.
SWBC clients were not incredibly active ahead of the NFP release. However, we noticed a consistent pace of participation as funds continue to flow into the tax-exempt municipal market. The steady pace of new issuance feeding the appetites of investors remained strong through the month of August. Looking forward through September, the pace does not appear to be abating. The forward calendar is the largest in nearly 4-years for the month. Issuers are trying to lock in borrowing needs before Nov 5th. Despite expectations for some cooling off around the election as issuers take a breather to avoid potential pricing volatility, several strategists are revising their forecasts for total supply in 2024 to be meaningfully higher. I concur with this assessment and anticipate supply to resume its heady pace once the election cycle clears our calendars.
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.
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