WEEK ENDING 6/13/2025
- Happy (belated) Father’s Day
- Inflation reports look muted, but what could they be hiding?
- “Soft data” looks promising
- Did the president just reverse his stance on deportations? Someone should tell Stephen Miller
A CITY DIFFERENT TAKE
Despite our commentary falling on the week ending Friday, June 13, we will persevere to get it out and hope for the best. (If you’re asking if we’re superstitious, the answer is yes!)
The latest economic data releases this week started off on the positive side. Both core CPI and core PPI came in marginally below expectations. Year-over-year core CPI came in at 2.8%, matching April’s reading and below expectations of 2.9%. Year-over-year core PPI came in at 3.0%, below April’s revised reading of 3.2% (revised from 3.1%) and below expectations of 3.1%.
The questions facing market participants are:
- What are the impacts of the administration’s chaotic trade discussions?
- Are they reflected in the May numbers?
- What is the impact of corporate inventory builds on these results?
We also received some updated “soft data” readings. The June preliminary reading for the University of Michigan Consumer Sentiment Index was 60.5, above last month’s reading of 52.2 and above expectations of 53.6. Not to be a wet blanket, but even at these levels (one number does not a trend make), the reading is well below the long-term average of 79.5 (since March 2005). For those keeping score, that’s 1.45 standard deviations below the long-term average. The soft data is important because it can be a precursor to changing consumer behavior. The consumer drives anywhere between 60% and 70% of the U.S. economy. See the graph below:
On Thursday, Israel launched a preemptive attack on Iran. By all reports, it was very successful. As of this writing, the U.S. equity markets were down and the oil markets are higher on the news. Bloomberg reported July futures up $3.96 to $72.58; that contract opened the day at $68.68. Energy has been a major contributor to the benign inflation reports, and Israel’s actions may jeopardize these windfalls.
CHANGES IN RATES
The Treasury market is lower in yield on the week across all tenors. The five-year maturity led the way again. Five-year and ten-year maturities outperformed all others. The yield curve, as measured by the spread between the two-year and ten-year maturities, marginally flattened at 0.45% versus 0.47%. An investor still earns about 91% of a ten-year’s income with a five-year Treasury bond and only adds about 50% of the duration risk.
The municipal market underperformed the Treasury market last week, as it digested $17+ billion of new issuance. The supply bulge seems to be abating; there is only $5+ billion of new issuance debt scheduled for this week. The yield curve, as measured by the spread between the two-year and ten-year maturities, was unchanged at 0.47% week over week. An investor still earns about 85% of a ten-year’s income with a five-year Muni bond and only adds about 50% of the duration risk.
Municipal bonds underperformed their Treasury equivalents on the week, especially in the five-year maturity, as market participants digested $17+ billion of new issuance supply.
Corporate yields followed Treasuries and were lower for the week.
THIS WEEK IN WASHINGTON
The President has realized that what Lin-Manuel Miranda captured in his musical Hamilton may have some significance: “Immigrants, we get the job done.”
This week, the president admitted that the immigrant workforce is essential to specific segments of the economy:
“President Donald Trump admitted that his increasingly aggressive immigration crackdown is hurting farmers and the hotel and leisure industry and said ‘common sense’ changes are coming.” And the light bulb goes off
Someone should tell Stephen Miller so he can adjust his 3,000 per day arrest quota.
“White House Deputy Chief of Staff Stephen Miller’s orders to federal agents to arrest more people without criminal convictions likely sparked the immigration arrests that ignited protests in Los Angeles. The arrests at Home Depot triggered the protests and the escalating response, including Donald Trump’s use of the National Guard. The controversy solidifies the view that the Trump administration’s goal is to achieve a high level of deportations rather than remove people with criminal convictions. The policy increases the legal peril for businesses and immigrant workers.”
The senior senator from California got roughly handcuffed by federal agents on live television at the DHS Secretary’s press conference.
“Sen. Alex Padilla, D-Calif., was forcibly removed from a news conference in Los Angeles on Thursday after he tried to question Homeland Security Secretary Kristi Noem during a media event related to immigration.
“‘I am Sen. Alex Padilla. I have questions for the secretary,’ Padilla told Noem, which prompted several men dressed in plainclothes to push him out of the room. A top FBI official later said bureau personnel and Secret Service agents were involved in his removal.”
Did the senator identify himself? The tape says yes, but the DHS Secretary has a different memory: Video
“The Department of Homeland Security (DHS) said Padilla did not initially identify himself as a senator, and was not wearing his Senate security pin.”
Everybody Loves a Parade…
President Donald Trump hosted a major military parade in Washington, D.C. on Saturday, celebrating the Army’s 250th anniversary. Saturday was also the president’s 79th birthday.
“The event is expected to cost tens of millions of dollars, according to defense officials, and will feature thousands of soldiers, hundreds of vehicles, and dozens of military aircraft.
“Several progressive groups are joining forces to host a series of ‘No Kings’ protests around the country, with over 1,500 rallies expected Saturday. But the organizers decided against a Washington protest, instead holding the flagship event in Philadelphia.”
The weather cooperated, the parade started 30 minutes earlier than planned, and the threat of “heavy force” was moot.
“The White House on Wednesday attempted to clarify President Donald Trump's threat the day before to use ‘heavy force’ against ‘any’ protesters at the military parade this weekend in Washington celebrating the Army's 250th anniversary.”
All this in only one week…fortunately, today’s market is focused elsewhere.
WHAT, ME WORRY ABOUT INFLATION?
The 5-year Breakeven Inflation Rate finished the week of June 13 at 2.25%, 2 basis points lower than June 6. The 10-year breakeven inflation rate finished the week at 2.28%, 3 basis points lower than the May 30 observation.
MUNICIPAL CREDIT
As of June 13, the 10-year quality spreads (AAA vs. BBB) were unchanged for the prior week at 0.94% (based on our calculations). The long-term average is 1.69%.
TAXABLE CREDIT
However, investment grade is showing some movement at 0.97%. The high yield spread is lower at 2.98%.
WHERE ARE FIXED-INCOME INVESTORS PUTTING THEIR CASH?
Money Market Flows (millions of dollars)
Overall, money market funds were down last week. Prime money market funds did show some signs of life.
Mutual Fund Flows (millions of dollars)
Cash flows into bond mutual funds were positive for the last week. Municipal proved to be the “redheaded stepchild” of the group.
ETF Fund Flows (millions of dollars)
ETF asset classes saw a net decrease in inflows over the period.
SUPPLY OF NEW ISSUE BONDS
The supply of new municipal bond issues is expected to be closer to $5+ billion this week. If this is the return to normal new-issue supply levels, the municipal market should perform well. As we said before, “if” is the scariest word in risk management. This follows the last four weeks of a large calendar of $10+ billion.
CONCLUSION
Last week’s inflation releases looked promising, but much of the administration’s policies may not have been reflected in these statistics. The “soft data,” although stronger than recent releases, is still soft by historic levels. The market forecasts a 62.4% probability of a 0.25% cut in short-term rates in September. We will await this week’s Fed meeting for an update. As of Sunday morning, Israel air strikes on some of Iran’s oil production facilities could add to potential inflationary pressures. If markets hate uncertainty, between the Israel-Iran conflict, ongoing trade negotiations, changing immigration directives, and, oh yeah, the Ukraine-Russia war, there is a lot of uncertainty to hate.
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