We hope everyone enjoyed the long Fourth of July weekend.
Speaking of fireworks, it looks like hostilities have resumed between Iran and the United States.
“US and Iran launch new strikes, and Trump tells NATO deal with Tehran is ‘over’ – as it happened.”
In response, the August futures contract for West Texas Intermediate Crude increased from $68.69 on July 2 to $71.84 on July 10, a 4.6% increase. The 10-year Treasury bond’s yield increased about .06%, and the S&P 500 index increased 66.79 points (0.89%) over the same period.
If that wasn’t enough, the president followed his Iran comments with halting trade with NATO ally Spain:
“Trump ordered a halt to all trade with NATO ally Spain, escalating tensions over the Iran war and made renewed claims on Greenland.” So Proud to be an American
To top it all off, Trump put his thumb on the scale of the World Cup by calling the president of FIFA to complain about the red card one-game suspension of star USMNT striker Folarin Balogun. The suspension was reversed, but the American team lost its next match and was eliminated from the tournament. Between that and attending the only loss the “Nova Knicks” were delt in the NBA Finals, there might be growing conspiracy theories about him as a “talisman.”
May’s year-over-year core PCE was released on June 25 and came in at 3.4%, up .01% from the April release — and well above the current Fed’s 2.00% target. The question is how will new Fed Chair Kevin Warsh’s task forces change these measurements and other Fed operations. The Dallas Trim Mean — the rumored alternative to core PCE as the Fed-favorite inflation measure — came in at 2.41% for the same period. Warsh announced the leaders of his five task forces last week:
Communications: Reviews how the Federal Reserve conveys policy deliberations and decisions amid uncertainty.
The Fed has two mandates: 1) full employment and 2) stable prices. Based on his first presser, Warsh seems to be more concerned about the second mandate. The June jobs report of 57,000 new jobs was well below estimates of 111,000. This number is well below the average of 164,000 new jobs for the last three months. The number from the February release was revised down to -156,000. This is a volatile time series, and one number does not a trend make — but it is worth factoring into rate decision.
Consumer sentiment is still quite low. May’s release was 49.5, well below the long-term average of 78.4. The Iran conflict, inflation, and the jobs picture all influence the low consumer sentiment numbers and (more importantly) have a significant impact on the Fed’s interest rate decisions and the midterm elections.
CHANGES IN RATES
TreasuryMarket
Treasury yields were higher for the week. The 2/10 spread is at 35 basis points. The renewed military operations between the U.S. and Iran put pressure on rates.
MunicipalMarket
Another week of muni outperformance. Munis did not move as much as their Treasury equivalents last week but remained expensive. The 2/10 slope is at 61 basis points, flat by historical standards.
Selected Municipal AAA General Obligation Bond / Selected Treasury Bonds Yield Ratio
The municipal bond market richened in the week after the Fourth of July. The January/July effect is in full stride. Munis are rich according to their seasonal pattern.
Investment Grade Corporates
Investment grade corporate yield completely diverged from Treasury market rally. Credit markets saw rates go up. The 2/10 spread is stable at 85 basis points.
The president was in Ankara last week for the NATO summit and in an opinion piece in the Wall Street Journal (“The NATO Summit’s Successes”), the summit was summarized as follows:
“The North Atlantic Treaty Organization’s recent summit came in like a lion and went out like a lamb. The worst outcomes were avoided at this week’s meeting in Ankara, Turkey — good news for European and American security. That happened despite controversies beforehand over Greenland, the American commitment to NATO’s mutual-defense clause, Europe’s role in the Iran War, and allied burden-sharing. These political disagreements didn’t disappear, but the allies were able to avoid a more significant public rupture. President Trump praised the unity and affection he perceived at NATO’s roundtable, and allies made significant improvements to their shared security.
“Expectations of a potentially disastrous Ankara gathering weren’t met. Avoiding a presidentially induced crisis is a low bar, but this sort of summit minimalism has come to represent success.” What a success, nothing broke maybe?
In addition to the NATO Summit, Israel shared their intelligence that Iran had a new plan to assassinate President Trump.
“Israel shared new intelligence with the U.S. that it said indicated a fresh Iranian plan to kill President Trump, people familiar with the matter said, a finding that would mark an escalation in the war between Washington and Iran.” Eye for an Eye
Would this be in Israel’s interests to keep the U.S. engaged in the Iran conflict while they have their way with Lebanon?
Meanwhile back at home, the Wall Street Journal also reported, “Trump Says He Won’t Sign Landmark Housing Bill”:
“President Trump said Friday he wouldn’t sign a landmark housing bill designed to address voters’ affordability worries, protesting the lack of action on his sweeping voter-ID proposal in the Republican-controlled Congress.
“The White House didn’t immediately clarify whether Trump planned to veto the legislation. It is set to become law automatically this weekend if Trump takes no action.” Makes the mid-term tougher
Funny how bad news and bad policy gets announced on Fridays.
There was another ICE-related death last week, this time in Houston, Texas. ICE’s excuses are almost the same as those used in the January deaths of Renee Good and Alex Pretti in Minnesota. As the midterms approach, none of this is good for Republicans.
Finally, there are reports that the White House is planning to add permanent fencing along Pennsylvania Avenue.
Garry Trudeau, the creator of “Doonesbury,” foretold this years ago.
The graph above contrasts a 5-year Breakeven Inflation Rate (this is the market-implied inflation rate) tracked weekly with the core PCE inflation rate. The 5-year Breakeven Inflation Rate finished the week of July 10 at 2.28%. The 10-year Breakeven Inflation Rate finished the period at 2.24%. Both these numbers are marginally higher week over week.
The 10-year quality credit, which is the difference between BBB revenue bonds and AAA general obligation bonds, was at 0.92%.
Investment-grade spreads for the past week were at 89 basis points. The long-term average for investment grade is 1.56%. High-yield credit spreads are 2.55%.
Money Market Flows (millions of dollars)
Money market fund flows were positive with outflows in the Tax Exempt category.
Mutual Fund Flows (millions of dollars)
Mutual fund cash flows were mixed for the week.
ETF Fund Flows (millions of dollars)
Net ETF flows were mixed week over week.
This week’s calendar is $11+ billion. This year’s supply calendar has been robust and running 120% of the 5-year average.
The conflict with Iran turned hot again. Violations of a ceasefire are not unheard of during negotiations. This has put more pressure on oil prices although not as much as the markets experienced earlier. The municipal market is rich by historical standards.
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