WEEK ENDING 10/4/2024
- The monthly jobs release was a surprise.
- The municipal market participants must have missed work on Friday.
- Longshoremen are back to work after a 3-day work stoppage.
A CITY DIFFERENT TAKE
The week started off strong, with Chair Powell attempting to quell the market's optimism for more 0.50% cuts in the Fed Funds range.
“Federal Reserve Chair Jerome Powell signaled Monday that more interest rate cuts are in the pipeline but suggested they would occur at a measured pace intended to support a still-healthy economy.”
This week’s economic releases hinted at this dose of reality. The JOLTS job opening report came in at 8.04 million, beating market expectations of 7.7 million. Plus, the July release was upwardly revised. More hints of the economy's underlying strength continued. The ISM services index came in at 54.9, above both expectations and last month’s reading. Friday’s monthly jobs release confirmed the prior hints. The change in nonfarm payrolls (+223,000) blew past expectations (+125,000). The unemployment rate dipped to 4.1% (only one-hundredth from rounding to 4.0%), again below both last month’s release and the expectation of the current release. Average hourly earnings Y/Y came in at 4.0%, above the expectation of 3.8% and above a revised August 3.9%.
All in all, the talking heads replaced talk of a soft landing with mention of no landing for the economy. Do we think the Fed made a mistake? It is too early to tell. For those statistically inclined, all the Fed’s 0.50% rate cut did was move the real Fed Funds rate from a 1.79 standard deviation event to a 1.50 standard deviation event (using core PCE as an inflation measure). Or, to put this into English, a long distance from the 20-year average real Fed Funds rate (2.23% versus -0.41%).
CHANGES IN RATES
Treasury yields moved higher on the week. The jobs numbers surprised everyone except maybe Jerome Powell, who cautioned earlier in the week not to expect a repeat -0.50% performance.
We have been warning about the “Cash Trap” for some time. Money market investors should prepare themselves for significant yield reductions. This week, Barron’s talked about why it may be too late to get out of money market funds.
Caution before you read any further! These are the correct numbers! Unbelievable!
The municipal curve did not move much last week. The collective known as the municipal market must have turned off its screens all day Friday, or maybe aliens kidnapped it. There is no reasonable explanation for such a comatose reaction to the jobs report. Even a focus on another $8 billion calendar this week does not explain this reaction. We expect a recovery to reality this week.
Municipals, as measured as a ratio versus their Treasury equivalent maturities, were extraordinarily lower over the week, another sign of the municipal market’s cognitive dissonance.
Corporate yields were higher on the week. Which of those three markets is not like the others?
THIS WEEK IN WASHINGTON
The East and Gulf Coast Longshoreman’s strike ended after three days. President Biden refused to invoke the Taft-Hartley Act, and the parties reached an agreement to extend the current contract until January. This should relieve potential inflationary pressures and product shortages going into the election.
There was a vice presidential debate last week. JD Vance seemed very reasonable, and Tim Walz recovered after a slow start. It all seemed quite congenial… but why don’t we trust it?
The swing states remain in focus. Liz Cheney was campaigning for Vice President Harris in Wisconsin, while Magic Johnson stumped for Harris in Michigan. Elon Musk made his first Trump rally appearance in Pennsylvania.
FiveThirtyEight showed Vice President Harris had a 2.5-point lead over former President Trump as of October 5, a margin which has remained steady over the last month.
WHAT, ME WORRY ABOUT INFLATION?
The 5-year Breakeven Inflation Rate finished the week of October 4 at 2.32%, 29 basis points higher than the close of September 27. The 10-year Breakeven Inflation Rate finished the week at 2.23%, eight basis points higher than the close of September 27.
MUNICIPAL CREDIT
As of October 4, 10-year quality spreads (AAA vs. BBB) were 0.90%, 18 basis points tighter than the September 27 reading (based on our calculations). The long-term average is 1.70%. We would caution everyone not to believe this number given the municipal market’s reaction to the jobs number. Aliens are among us!
Quality spreads in the taxable market are not attractive. They ended the week at 0.78%, 11 basis points lower than the week prior. High-yield quality spreads were 13 basis points lower at 2.77%.
WHERE ARE FIXED-INCOME INVESTORS PUTTING THEIR CASH?
Money Market Flows (millions of dollars)
Overall, money market funds saw higher cash flows.
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 all experienced mixed inflows.
SUPPLY OF NEW ISSUE MUNICIPAL BONDS
The supply of new issues is expected to be about $8.1 billion this week.
CONCLUSION
One week’s worth of numbers is not a trend, to paraphrase Mark Twain. We believe reports of an economic slowdown, soft or otherwise, are greatly exaggerated. Next week, we get CPI and PPI. Will inflation be impacted?
IMPORTANT DISCLOSURES
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