The markets got another peek at an updated inflation picture. Year-over-year core CPI of 3.1% exceeded projections (3.0%) and last month’s read (2.9%). Although CPI was (marginally) higher than expected, the fixed income market barely moved. The 10-year Treasury security ended the day at 4.29%, down slightly from the prior day’s close of 4.30%.
The real surprise was the PPI report. Year-over-year core PPI came in at 3.7% versus expectations of 3.0% and last month’s reading of 2.6%. The Treasury secretary moonwalked back an earlier call for 1.50% cut in the Fed Funds rate. Bloomberg reported the secretary’s Fox Business interview:
Treasury Secretary Scott Bessent pushes back on claims he’s pressuring the Fed to slash rates
"I didn't tell the Fed what to do. What I said was that to get to a neutral rate on interest, that would be an approximately 150 basis point cut. I did not call for them to get there," he clarified on "Mornings with Maria," Thursday.
"The other thing that I said was that perhaps because they had bad BLS data in June and July that perhaps, perhaps, a 50-basis point cut in September was warranted," he continued. Moonwalking is Back!
The market’s implied probabilities of future Fed rate cuts are for the week are as follows:
The field for the Fed chair has expanded from the two Kevins (Hassett and Warsh) to now include Jefferies Chief Market Strategist David Zervos, former Fed Governor Larry Lindsey, and Rick Rieder — chief investment officer for global fixed income at BlackRock.
They join a list of eight other candidates that CNBC has confirmed are under consideration, including Fed Vice Chair for Supervision Michelle Bowman, Fed Governor Chris Waller, and Fed Vice Chair Philip Jefferson. The officials also confirmed the candidates include Marc Sumerlin, an economic advisor in the Bush administration, Dallas Fed President Lorie Logan, and former St. Louis Fed President James Bullard. A Fuller Field
What’s the best way to pick the next Fed chair? A compliment-athon, perhaps?
CHANGES IN RATES
Rates rose in the Treasury market, and the yield curve steepened. The 2/10-year spread increased from 51 to 58 basis points. Pressure is increasing on Chair Powell to cut short-term rates, although some critics are backtracking their criticism after the PPI release.
Yields in the municipal market were pretty stable on the week in spite of another heavy new issuance calander. The municipal yield curve steepened on the week. The 2/10-year spread in the muni market widened from 0.89% to 0.93%.
Treasury-muni ratios marginally decreased on the week.
Investment grade corporate bond yields moved slightly lower week over week.
We heard the terms “command-and-control economy” and “capitalistic economy” bandied about this week. We wanted to know more, but how does anyone satiate their curiosity these days? By asking Google for a definition, of course. (You can judge the veracity of both.)
Here are some recent headlines out of Washington:
1) Intel’s stock is rising as Trump suggests a path forward after CEO’s White House visit
- “Just days ago, Trump called for Lip-Bu Tan’s firing. Now he’s praising the Intel CEO’s ‘amazing’ success story, suggesting that tensions are easing.” Love to be a fly on that wall
- Intel’s Move Toward Nationalization Won’t Work—at Least for the Long Haul
“The Trump administration is discussing options with Intel that could involve the federal government taking a financial stake in the troubled chip maker. The idea came up during President Trump’s meeting with Intel Chief Executive Officer Lip-Bu Tan on Monday and the discussions are still in an early stage, The Wall Street Journal reported.” I wonder if that fly bought the stock?
2) Trump's unusual Nvidia deal raises new corporate and national security risks, lawmakers and experts say
- “Trump upended decades of U.S. national security policy, creating an entirely new category of corporate risk, when he made a deal with Nvidia to give the U.S. government a cut of its sales in exchange for resuming exports of banned AI chips to China.” What a Partner!
3) What is a 'golden share' — the American government's ownership stake in U.S. Steel?
- “In June, the White House announced it had acquired a “golden share” in Pittsburgh-based United States Steel Corp. as part of a takeover by Japan’s largest steelmaker, Nippon Steel Corp.” What a Partner 2!
4) All E.J. Antoni’s Labor Statistics
- Does Trump’s nominee for the Bureau of Labor Statistics (BLS) have a plan to make data more reliable?
“Few people trust China’s economic data because they know the government serves the interests of the ruling Communist Party. Antoni will have to take off his MAGA hat if he wants to ensure that the public and markets can trust BLS data.” Mark Twain said it best, "There are lies, damned lies and statistics"
5) Trump threatens Fed chair Powell with ‘major lawsuit,’ demands interest rate cut
“Trump on Tuesday threatened to allow a “major lawsuit” against Federal Reserve Chairman Jerome Powell to proceed, escalating his pressure on the central bank leader to cut interest rates.” No Pressure
6) Trump tells Goldman Sachs CEO to hire a new economist after bank says consumers will pay bulk of tariff costs
“Days after Goldman Sachs’ top economists published research claiming price increases stemming from higher tariffs are poised to soon be borne mostly by consumers, Trump is urging the bank’s CEO, David Solomon, to get a new economist.
I think that David should go out and get himself a new Economist or, maybe, he ought to just focus on being a DJ, and not bother running a major financial institution,” Trump added.” Supply demand driven
7) Trump admin dismisses all Democrats from Puerto Rico's financial oversight board
- The Trump administration has dismissed five out of seven members on Puerto Rico’s federal control board that oversees the U.S. territory’s finances, sparking concern about the future of the island’s fragile economy. The five fired are all Democrats. Beats throwing paper towels
8) Trump deployed the National Guard and declared federal control of DC police. Here’s how he is able to do it:
- The DC National Guard began appearing in the nation’s capital on Tuesday after Trump announced a day earlier he is deploying guard troops and placing Washington, DC’s police department “under direct federal control,” citing a public safety emergency after an assault on a former government worker.
- Despite Trump’s claims Monday that crime is “out of control,” data shows violent crime in Washington, DC, has been declining since its 2023 spike, with two years of sustained improvement. Facts are subjective
That’s a quick summary of some of the events coming out of D.C. — we leave it to our readers to determine which category each headline falls under.
Chris Ryon, who shares the responsibility of penning this weekly report, recently began reading Ron Chenow’s biography of Mark Twain. So you can expect many of Twain’s quotes to find their way into the Weekly Commentary, for two reasons:
1) Recency bias
2) Twain is still pretty damned relevant
For example:
“Vast power and wealth corrupt a nation. It incites dangerous ambitions and can bring the republic down. It can pack the Supreme Court with members friendly to its purposes, run down the Congress and crush the people’s voice” Maybe he said it or maybe not!
The 5-year Breakeven Inflation Rate finished the week of Aug. 15 at 2.34%, 2 basis points higher than the previous period. The 10-year Breakeven Inflation Rate finished the period at 2.38%, 1 basis point lower than the observation from last week.
As of Aug. 15, the 10-year quality spreads (AAA vs. BBB) were at 0.89% (based on our calculations). The long-term average is 1.69%.
There have been some significant headlines in the municipal high-yield space:
1) American Dream megamall gets $850 million sliced off its tax assessment
- A judge has slashed the assessed value of New Jersey’s American Dream megamall by roughly $850 million following an appeal by the development's landlord.
- The ruling Thursday by New Jersey Tax Court Judge Michael Gilmore takes the assessed property value of the 3.5 million-square-foot complex down to about $1.65 billion from $2.5 billion. The assessment for the 2025 tax year had already been cut in March, when the borough of East Rutherford dropped it by $800 million from $3.3 billion to $2.5 billion. The two reductions add up to a roughly 50% decrease in the shopping-and-entertainment hub's assessment.
- American Dream and East Rutherford Borough Attorney Gerald Salerno declined to comment Friday on the ruling. Nuveen, which owns most of the American Dream municipal bonds backed by the PILOT payments, didn't return an email from CoStar News seeking comment.
- This lowers the tax bill but hurts municipal bond holders whose interest payments are based on the assessed value, referred to above as PILOT payments (Payment in Lieu of Taxes).
2) Brightline Florida Bondholders Hire Lawyers as Train Line Seeks to Cut Debt
- Fortress Investment Group is seeking fresh capital from investors as Brightline bondholders prepare for negotiations ahead of a critical debt deadline.
- Florida’s Brightline high-speed rail line, owned by Fortress Investment Group, is in talks with a group of municipal bondholders to extend a bond repayment deadline, as the owner seeks fresh capital to pay down debt, according to people familiar with the matter. Driving that train...Casey Jones you better watch your speed!
Investment grade spreads are extremely tight at 0.72%, compared to a historical average of 1.11%. The high yield spread is lower at 2.72% versus a historical average of 4.6%. We believe that both these markets are overpriced on a spread basis.
Money Market Flows (millions of dollars)
Money market fund flows were much higher week over week.
Mutual Fund Flows (millions of dollars)
All asset classes experienced net outflows week-over-week.
ETF Fund Flows (millions of dollars)
ETF asset classes saw a net inflow over the week.
Next week we get a respite for the torrid pace of new municipal issuance. The estimated call for $7.5 billion of issuance, below the $10+ billion Mendoza line between high and moderate new issuance.
There looks to be some inflation pressures building in the system. We are careful not to let one data point drive our decision making. There is increased pressure on the Fed to cut short-term interest rates. This, coupled with the more important value metrics we have been sharing in this weekly piece, makes us very comfortable with our strategy to have a neutral duration target coupled with an overweight of each SMA’s front end of their respective investment universes. In our minds, all the data we are seeing, the slowing job market, and rising inflation pressures are increasing the likelihood of a stagflation-light scenario playing out.
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