WEEK ENDING 12/6/2024
- We’re back!
- Rallies continue as Powell urges caution.
- Saturday, December 7, marked the 83rd anniversary of the attack on Pearl Harbor — ‘a day that will live in infamy.’
- Taylor Swift’s ‘Eras Tour’ wraps up. Sad for some, a relief for others.
A CITY DIFFERENT TAKE
The markets are resuming their rally after the Thanksgiving holiday.
The big news this past week was the November jobs report. It is still a little squishy, given the recoveries from the Boeing strike in October and the hurricanes that blasted the Southeast. The change in nonfarm payrolls exceeded the survey by 7,000 (227,000). October’s numbers were revised to 37,000 from the original 12,000 (impacts of the Boeing strike and hurricanes). Private payrolls came in a little lower than expected (194,000 compared to an expected 205,000). Hourly earnings were up 4.00% year-over-year. This exceeds October’s year-over-year CPI spike of 2.6%. This means real wages are increasing — an issue that plagued the Democrats in the election.
The economy looks to be in good shape, which may cause the Fed to slow down its rate reduction campaign. At the beginning of November, the market’s expectation for a December rate cut of 0.25% was 97.25%; as of December 6, that probability dropped to 85.1%. Chair Powell urged caution over the need to aggressively cut the Fed Funds rate:
“Powell's own remarks on Wednesday appear to align him with that more cautious bloc of policymakers and largely echoed his last public appearance in mid-November, when he said the Fed could ‘carefully’ deliberate over its rate cuts and need not be in a hurry.”
Over the holiday period, the Treasury curve flattened. The 2-to-10-year spread went from +0.20% on November 22 to +0.05% on December 6, further evidence that the market is taking Chair Powell’s warning to heart. After all this, the equity markets are hitting new highs, and the bond market is recovering from its recent yield rally.
CHANGES IN RATES
Treasury rates moved lower, with yields moving lower as well.
The municipal rates moved over the same period but underperformed their Treasury equivalents.
As measured as a ratio versus their Treasury equivalent maturities, municipalities moved higher in maturities of 10 years and shorter. In longer maturities, the ratio move was marginal.
Corporate yields were lower over the comparison period.
THIS WEEK IN WASHINGTON
The Thanksgiving season is behind us. President Biden pardoned two turkeys — three, if you count his son. There are reports that the administration is considering preemptive pardons for those on various “enemies lists.”
President-elect Trump is not without his selection of turkeys. Matt Gaetz has already withdrawn from consideration for attorney general. Meanwhile, Trump’s nominee to head the Department of Defense looks to be in trouble, with different replacement names already being floated. Did the recent California earthquake dislodge the United States and place us south of the equator? Have we become a banana republic? You cannot make this stuff up.
Many commentators on the left are wringing their hands and lighting their hair on fire about this new administration. We have used this Ghostbusters quote before, but feel the equivalency is stark:
“Dogs and cats living together — mass hysteria!”
We have a more sanguine read on the new administration, based on the fact that people will pursue their self-interests. This observation is especially acute in politicians (no matter the party). So, what is a Washington-based politician’s primary self-interest? The acquisition of power.
The election results were a win for President-elect Trump but not a mandate, no matter who says it was. President-elect Trump garnered 49.9% of the popular vote and 312 electoral votes (compared to 48.3% for Vice President Harris). By contrast, in 1980, Ronald Reagan won 50.7% of the popular vote (Carter 41%, Anderson 6.6%) and 489 electoral college votes. Now, that is a mandate. Meanwhile, Republicans hold slim majorities in both the House and Senate.
Let’s get back to the essence of power. In our view, power equals money. Power is manifested in two ways:
- Having enough power to influence policy, so much so that lobbyists will beat a path to your door to make sure their client’s ox does not get gored with all the persuasive tools in their tool bag.
- Having enough power to “bring home the bacon.”
House and Senate members will try to acquire power rather than cede it to the executive branch. An example: Elon Musk and Vivek Ramaswamy were on Capitol Hill Thursday discussing their Department of Government Efficiency (DOGE).
“‘We have long lamented the size and scope of the government, that it has grown too large,’ Johnson said. ‘Government is too big, it does too many things and it does almost nothing well. And the taxpayers deserve better.’”
That sentiment is all well and good, but whose constituency is going to shoulder the cuts? This call to action is great politics, complaining about something that has a low probability of changing.
The F-35 fighter jet program is a perfect example; Musk has long been a critic of this aerial fighting platform:
“In an X post last month, referencing a Bloomberg report about reliability and security issues with the jet, Musk said, ‘Some idiots are still building manned fighter jets like the F-35.’” A Texas-Sized Fight
The headline from KERA News sums up the issue very nicely:
“An F-35 fight? Support for Fort Worth-produced aircraft could derail government efficiency cut”
Speaker Johnson was asked how Thursday’s meeting with Musk and Ramaswamy went on the televised segment of an MSNBC report about these meetings. He said they were productive and then hightailed out of the gaggle of reporters because he was late for a portrait unveiling. When did you last see a politician run away from the press (unless it was embarrassing), and why?
It appears the new administration will provide much fodder for this space. Power = money.
WHAT, ME WORRY ABOUT INFLATION?
The 5-year Breakeven Inflation Rate finished the week of December 6 at 2.17%, 26 basis points lower than the close of November 22. The 10-year Breakeven Inflation Rate finished the week at 2.24%, 10 basis points lower than the close on November 22.
MUNICIPAL CREDIT
As of December 6, 10-year quality spreads (AAA vs. BBB) were 0.98%, 4 basis points tighter than the November 22 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 0.73%, the same as of the November 22 reading. High-yield quality spreads were 8 basis points higher at 2.59%.
WHERE ARE FIXED-INCOME INVESTORS PUTTING THEIR CASH?
Money Market Flows (millions of dollars)
Overall, money market funds saw positive inflows compared to the week prior.
Mutual Fund Flows (millions of dollars)
Cash flows into bond funds were lower, with the exception of IG.
ETF Fund Flows (millions of dollars)
ETF asset classes experienced positive flows, but down on the week.
SUPPLY OF NEW ISSUE MUNICIPAL BONDS
The supply of new issues is expected to be about $10.5 billion.
CONCLUSION
Both the bond and equity markets continue to rally. The steepening of the yield curve’s slope has taken a rest, no doubt in reaction to the economy's continued strength, Chair Powell’s cautious note, and the potential inflationary implications of some of the new administration’s anticipated policies. The slope of the yield curve is still very flat by historical standards.
A couple of articles have been published referencing the potential for the changing value of the municipal bond market relative to other fixed-income markets (cheapening based on lower marginal tax rates) due to the new administration’s anticipated policies. We believe it is too early to make any strategic or tactical changes to our SMAs. The new administration has a lot on its plate, and it is still unclear where the municipal bond market lands on its list of priorities. There is an old English proverb that goes:
“There’s many a slip ‘twixt the cup and the lip.”
Its meaning is that things can still go wrong even when an outcome seems certain. Given our earlier discussion of power in the House and the Senate, one needs a higher degree of certainty before making any strategic changes. In that light, we believe our strategic positioning of neutral durations and overweights to the front end of each SMA strategy’s investment universe should limit any potential downside.
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