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WEEK ENDING 8/22/2025
- What did Chair Powell’s Jackson Hole speech mean for the markets?
- Another Fed governor under fire!
- Can the administration rewrite history?
- Happy Labor Day — we will be taking a break.
A CITY DIFFERENT TAKE
Federal Reserve Chair Jerome Powell gave the markets what they wanted to hear with his speech in Jackson Hole on Friday. The stock market heard “easing is on the way” and responded with a powerful rally. The S&P 500 ended Friday with a 1.52% gain. The 10-year Treasury security was lower in yield by 7.6 basis points (a big move in fixed-income terms).
But as we listened to Powell, we came away with a different takeaway — that Chair Powell was as consistent and data dependent as he has been throughout his entire tenure.
“On Friday, Powell noted the conflicting pressures policymakers currently face. ‘In the near term, risks to inflation are tilted to the upside, and risks to employment to the downside—a challenging situation.’ But he clearly prioritized the latter.
“While noting an historically low unemployment rate of 4.2%, weakening labor supply owing to the sharp decline in immigration, and the lack of layoffs (indicated by a low level of new claims for jobless benefits), he described the labor market as being in ‘a curious kind of balance that results from a marked slowing in both the supply of and demand for workers.’ That, Powell said, could lead to ‘sharply rising layoffs and unemployment.’”
Some heard a different message:
“For the moment, however, Powell’s much-anticipated keynote address to the Kansas City Fed’s annual policy confab in Jackson Hole, Wyo., delivered what financial market participants had hoped to hear: The Federal Open Market Committee is prepared to resume easing its monetary policy at its next meeting, which concludes Sept. 17. That is likely to come via a 25-basis-point (one-quarter percentage point) reduction in the federal-funds rate target range, which has remained at 4.25% to 4.50% since last December.” A Consistent Message
There is still more data to come. A PCE inflation release and another jobs report are on the horizon, if either can be believed. (Is it true that the most tenuous job in Washington is the number two at Bureau of Labor Statistics?)
Yes, the markets partied on Friday — but we will see if that optimism can be maintained this week.
The team at City Different Investments (CDI) recently published a blog entitled, “Is the Market Rhyming with 2008?” Musings of a Portfolio Manager. In this piece, the Fixed Income Team (FIT) at CDI stated:
“(We’ve) been feeling uneasy about financial markets lately… not because (we) think we’re headed for a carbon copy of 2008, but because a few old patterns are starting to bubble back up. Not in the same costume, but the themes are sounding a bit too familiar for (our) tastes.”
Observations by Barrons give the FIT at CDI little comfort:
“By any measure, the markets are partying hearty, with stocks hitting records, corporate credit spreads at quarter-century lows, plus myriad signs of speculative fervor. Those include margin debt topping $1 trillion for the first time, the revival of initial public offerings (most of which have experienced big opening-day price pops), record options activity, and even the revival of special purpose acquisition companies (SPACs), or blank-check companies for the next big thing.” More signs of the Apocalypse
The market’s implied probabilities of future Fed rate cuts for the week are as follows:
Sept. 17 is a long way away in financial market terms and we still have some significant releases coming our way. Much can change and many messengers can be shot fired. For example:
“The head of the Defense Intelligence Agency (DIA) was fired Friday weeks after the agency drafted a preliminary bomb-damage assessment – that was leaked to the media – suggesting that US strikes on Iran only set back the rogue nation’s nuclear program by a few months.” Fire the Messenger
CHANGES IN RATES
Rates declined in the Treasury market, and the yield curve’s steepness was unchanged. The 2/10-year spread remained unchanged at 0.58%. The administration’s “glare” has now captured another Federal Reserve board member, Fed Gov. Lisa Cook. Claims of mortgage fraud now seem to be the tool of choice by the administration. (More on that later.)
Yields in the municipal market were pretty mixed on the week; short-term yields were slightly lower and long-term yields were slightly higher. The municipal yield curve steepened on the week. The 2/10-year spread in the muni market closed the week of Aug. 15 at +0.93% and ended the week of Aug. 22 at +1.00%.
Treasury-muni ratios marginally increased on the week, illustrating the municipal market’s lag in reaction to Chair Powell’s Jackson Hole speech.
Investment grade corporate bond yields moved slightly lower week over week.
THIS WEEK IN WASHINGTON
The occupation of Washington, D.C. continues. It is difficult to get an accurate read on the results.
“Protesters continue to blast the Trump administration’s takeover of policing in Washington, D.C., likening it to an ‘invasion’ even as crime plummets.”
“The DC Police Union says crime has taken a tumble since the takeover was announced by President Donald Trump earlier this month. On Thursday, it was noted that there were no reported homicides in the city in the past week.”
"719 arrests and 91 illegal guns seized in Washington, D.C. Just yesterday, we made 40 arrests, took 5 more illegal firearms off our streets, and had 36 ICE arrests—including a suspected MS-13 gang member. Thank you [President Trump] for your unwavering support to make DC safe again!" Bondi posted to X on Friday morning.” One View
On the other hand:
“By contrast with central Washington, residents of Ward 8 in the city's southeast — the area with the highest crime rate — said there was not a guardsman in sight. With the ward's murder rate dwarfing that of most other neighborhoods, many locals said they would welcome troops on their streets. A Different Take
“In the week beginning Aug. 12, the first full day the Trump administration had control of the Metropolitan Police Department, property crimes dropped roughly 19% compared to the week before, and violent crime dipped by about 17%, according to the most recent public data published by the MPD.
“Those trends vary widely by types of crimes, however. While robberies and car break-ins were down by more than 40%, other thefts were flat week-to-week and there was a 6% increase in burglary cases and a 14% increase in cases of assault with a dangerous weapon, the data shows. There have been two murders since President Donald Trump signed his executive order taking control of the department, which is consistent with recent weeks in DC, though none since Aug. 13.
“Since Aug. 7, federal officials have arrested 300 people in DC who don’t have legal immigration status, the administration said — a more than tenfold increase over the typical ICE arrest numbers for the district, CNN’s review found.” Facts Vary?
What is next?
“Trump Looks to Chicago Next in Federal Crackdown” That Toddlin’ Town
It seems that accusations of mortgage fraud are the next tool in the administration’s toolbox to pressure Fed officials and opponents.
“In a letter dated Aug. 15, Federal Housing Finance Agency Director Bill Pulte said that Cook claimed two properties — a home in Michigan and a condo in Atlanta — as her primary home addresses. On Thursday, he said on social media the administration is “probing a 3rd property owned by Cook.” Let the Accusations Fly
“Trump says he’ll fire Fed Governor Lisa Cook ‘if she doesn’t resign.’” OK
There are several things to remember. Nothing has been proven, and if Cook did commit mortgage fraud, she should not be a Federal Reserve governor. An individual can only claim one primary residence on a mortgage application but there are exceptions. At this time, we do not know the particular validity of the accusations.
Finally,
FBI searches former Trump adviser John Bolton's home and office
“Sources familiar with the matter told ABC News that the search, carried out by the FBI, was related to allegations that Bolton is in possession of classified records.” And So It Goes
Can we rewrite history?
Trump escalates attacks against Smithsonian museums, says there’s too much focus on ‘how bad slavery was’
“President Donald Trump escalated his campaign to purge cultural institutions of materials that conflict with his political directives on Tuesday, alleging museums were too focused on highlighting negative aspects of American history, including ‘how bad slavery was.’” Why is History Important?
If you would like to read about the horrors of slavery, Chris suggests reading Mark Twain’s “A True Story”. Twain is many things; Chris doesn’t believe “woke” is one of them. (We warned everybody last week that there would be more Twain.)
To be completely honest, Chris has no idea what “woke” means. But he does know why history is important and cannot be sanitized. Pope Pius IX tried it in 1857 with the “Great Castration.” This was a period in the history of the Catholic Church when artists' renderings of male genitalia were masked with fig leaves in an effort to combat lust among clerics. How’d that work out?
Chris’s high school history teacher summed it up best (being one of the top three teachers Chris remembers). To paraphrase, “Not knowing history leads one or a society to have a higher probability of repeating past errors.”
WHAT, ME WORRY ABOUT INFLATION?
The 5-year Breakeven Inflation Rate finished the week of Aug. 22 at 2.48%, six basis points higher than the prior period. The 10-year Breakeven Inflation Rate finished the period at 2.41%, 3 basis points higher than the observation from last week.
MUNICIPAL CREDIT
As of Aug. 22, the 10-year quality spreads (AAA vs. BBB) were at 0.89% (based on our calculations). The long-term average is 1.69%.
TAXABLE CREDIT
Investment grade spreads are extremely tight at 0.95%, compared to a historical average of 1.57%. The high yield spread is lower at 2.71% versus a historical average of 4.58%. We believe that both these markets are overpriced on a spread basis.
WHERE ARE FIXED-INCOME INVESTORS PUTTING THEIR CASH?
Money Market Flows (millions of dollars)
On the whole, money market fund flows were higher week over week.
Mutual Fund Flows (millions of dollars)
All asset classes, except municipals, experienced net outflows week-over-week.
ETF Fund Flows (millions of dollars)
ETF cash flows were mixed over the week.
SUPPLY OF NEW ISSUE BONDS
Next week we get a respite for the torrid pace of new municipal issuance. The estimated call is for $6.6 billion of issuance, again below the $10+ billion Mendoza line between high and moderate new issuance.
CONCLUSION
Chair Powell was consistent in his Jackson Hole speech. The markets heard “easing is on the way.” We heard data dependency and a recognition of the weakening labor markets coupled with rising inflation risk from tariffs. This combines for a potential “stagflation light” in the future. Sept. 17 is not that far away, and we have two important data releases coming up. We will see if the market assigned probabilities of a Fed rate cut are correct. Remember last year when the market forecasted six to seven rate cuts in a year and we got three? Markets tend to overreact. We will see if Friday’s euphoria continues.
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