The September retail sales report suggested a strong U.S. consumer with spending trending up in Q3. This was supported by the September jobs report showing last quarter’s nonfarm payrolls at 186,000 per month. However, we think Hurricane Helene and Hurricane Milton will contribute to an increase in continuing claims. The Q3 GDP forecast hovers around 3%, with a lower projection for Q4.
September CPI inched higher than expected, increasing 0.2% (or a 2.4% year-on-year gain). Core CPI rose by 0.3%, or a 3.3% year-on-year gain. It’s a reminder to the market and the Fed participants that inflation is not a linear number. It is truly imperative to watch data evolve.
As pointed out above, GDP growth is strong. Ahead of the Fed’s meeting in November, the two numbers to watch for will be the PCE release (October 30) and the employment release (November 1). The November meeting in three weeks will be dominated by the outcome of the election. Recent speeches by Fed officials suggest steady support for a 25-basis-point cut for next month.
CHANGES IN RATES
Treasury yields moved slightly lower on the week.
The municipal curve kept up with the Treasury curve and moved lower through all tenors.
Municipals, as measured as a ratio versus their Treasury equivalent maturities, remained range-bound over the last week.
Corporate yields were higher on the week.
November will be dominated by political news. Going into this election cycle, our portfolios are neutral on duration. We have also seen episodic bear steepness, a scenario where long-end rises increase the spread between short-term and long-term rates. The 10-year Treasury rate has risen by 44 basis points since September 16.
A divided government leads to “more of the same” with minimal impact on yield. But clean sweeps by either party will likely lead to a bear steepening of the curve with increasing deficits and rising term premiums.
With only a couple of weeks left before Election Day (14.5 days to be exact), the presidential race is currently a toss-up. Some pundits believe it will be decided by seven battleground states, with polls “statistically deadlocked.”
The 5-year Breakeven Inflation Rate finished the week of October 18 at 2.39%, two basis points higher than the close of October 11. The 10-year Breakeven Inflation Rate finished the week at 2.31%, two basis points lower than the close a week prior.
As of October 18, 10-year quality spreads (AAA vs. BBB) were 1.00%, two basis points wider than the October 11 reading (based on our calculations). The long-term average is 1.70%.
Quality spreads in the taxable market are not attractive. They ended the week at 0.80%, two basis points lower than the week prior. High-yield quality spreads were six basis points lower at 2.80%.
Money Market Flows (millions of dollars)
Overall, money market funds saw net lower inflows compared to the week prior.
Mutual Fund Flows (millions of dollars)
Cash flows into bond funds were mixed on the week.
ETF Fund Flows (millions of dollars)
ETF asset classes experienced mixed inflows.
The supply of new issues is expected to be about $11.3 billion this week.
The market is somewhat subdued and pacing over the volatility that November is sure to bring. The Treasury market is showing signs of a bear “steepener.” Meanwhile, the U.S. economy is strong, with increases in retail spending and employment. CPI also came out higher than expected. But there are two very important data points to watch before the Fed’s next meeting: PCE and employment.
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