The Receipts Are In

WEEK ENDING 5/17/2024

• Core CPI increases by 0.3%; softer after higher inflation prints in Q1.
• Receipts come back with lower retail sales numbers.
• Three paths to monetary policy: hold, ease, or ease.
• In honor of Memorial Day, we are taking next Monday off from commentary.

A CITY DIFFERENT TAKE

Last week, we saw some big data releases: CPI, PPI, and retail sales. Two out of three (CPI and retail sales) point to a softer trend. Core CPI came out cooler for April. Headline CPI increased by 0.3%, a tenth lower than expectations. This brings the YOY number to 3.4%. Core PPI, also released last week, increased 0.5% in April.

April’s retail sales figures were disappointing. Headline numbers for the month were flat. Gas prices increased by a whopping 3.1%. We still see a strong consumer, but there is some cooling in the labor market and rising credit card delinquencies.

All of the releases point to a monetary policy that is working. Fed officials echoed Chair Powell’s message of continued patience for easing rates by holding rates higher until inflation comes down to 2%. Most Fed members think that the current policy rate is restrictive enough to slow down inflation and bring it to 2%. However, markets rejoiced at this modest data softness. Remember that the twelve-month data change in inflation is still higher this year than at the end of December 2024.

In a press conference, Chair Powell discussed three paths for monetary policy. If inflation continues to be higher than 2%, the policy will be “higher for longer” or a hold. If the labor market craters (which is the Fed’s other mandate), we will see a rate cut. Of course, in a soft-landing scenario, if inflation finds its way back to 2%, we should see a rate cut.

CHANGES IN RATES

Treasury rates moved to the downside in reaction to the softer CPI prints.

The municipal market’s yields barely moved last week.

The municipal/Treasury ratios increased across the yield curve, caused by lower Treasury rates and steady municipal rates.

Corporate rates were lower as they followed the steps of the Treasury.

THIS WEEK IN WASHINGTON

Iranian President Ebrahim Raisi, along with foreign minister Hossein Amirabdollahian, died in a helicopter crash. Raisi’s death is renewing debate over Iran’s next supreme leader, as Raisi was seen as something of a protégé and successor to Ayatollah Khamenei. Mohammad Mokhber, now the acting president, has called for elections to take place within the next 50 days. Khamenei’s son Mojtaba is seen as a possible candidate for president and future supreme leader.

At home, the Senate is expected to vote on a standalone border issue. This is in tandem with President Biden preparing to issue border-focused executive actions. The legislation is not expected to pass.

As President Trump’s hush money criminal trial nears its conclusion, he might testify in his own defense. He would like to testify, but there is a case for keeping quiet.

And well before the Fourth of July, the House saw some fireworks during a heated exchange between Rep. Jasmine Crockett (D–Tex.), Rep. Alexandria Ocasio-Cortez (D–N.Y.), and Rep. Marjorie Taylor Greene (R–Ga.). Who didn’t see that coming?

WHAT, ME WORRY ABOUT INFLATION?

The 5-year Breakeven Inflation Rate finished the week of May 17 at 2.32%, lower by two basis points from the close of May 10. The 10-year Breakeven Inflation Rate also finished the week at 2.32%, two basis points lower than the close of May 10.

MUNICIPAL CREDIT

As of May 17, 10-year quality spreads (AAA vs. BBB) were 1.10%, tighter by two basis points from the May 10 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 lower at 0.65%, down two basis points from the May 10 level. High-yield quality spreads were stagnant at 2.82%.

WHERE ARE FIXED-INCOME INVESTORS PUTTING THEIR CASH?

Money Market Flows (millions of dollars)

Money market funds saw positive cash flows in all classes. A quick note here on money market reform. According to JP Morgan, “…a total of six fund sponsors have chosen to either liquidate their institutional prime funds or convert them to government funds. Collectively, they held about $220 billion in AUM as of April-end, but only held just under $20 billion in CP/CD exposure.”

We have been examining this market closely and have not yet seen significant changes as a result of the reforms.

Mutual Fund Flows (millions of dollars)

Bond funds cash flows were mixed.

ETF Fund Flows (millions of dollars)

All ETF asset classes saw inflows.

SUPPLY OF NEW ISSUE MUNICIPAL BONDS

The supply of new issues is expected to exceed $13 billion this week, marking another strong week in the muni market. This has been a good year for municipal supply. YTD supply for tax-exempt bonds stands at $155 billion, about 45% higher than last year for the same period.

CONCLUSION

Last week, we saw soft data releases regarding CPI and retail sales. The highlight, however, was Chair Powell’s press conference, which suggested patience and a rate hold (for now). The municipal market has had a big issuance year so far. As next Monday marks Memorial Day, we honor and appreciate those men and women who sacrificed their lives for our great nation.

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