The U.S. labor market had a strong performance in April. On Friday, better-than-expected employment numbers showed nonfarm payrolls increased by 177,000, leading to a steady unemployment rate of 4.2%.
The participation rate in the workforce picked up in April to 62.6%, up from 62.5%. Average hourly earnings also rose 0.2%. Year-over-year wages rose 3.8% for the second consecutive month.
Looking under the hood, we see weakness in employment in the manufacturing sector because of tariff uncertainty. Job openings in the labor market fell to the lowest level since September 2024. The government sector showed the highest layoffs for the year, with 282,000 cuts due to DOGE actions.
Q1 GDP was also released. (GDP is the sum of all goods and services produced inside the country.) U.S. GDP fell by -0.3% for the quarter, marking the first decline since 2022. Note that this data has “residual seasonality” and is often revised.
The report’s complexity stems from its treatment of imports and inventory. Both data series have timing issues and often have mismatches. Even though imports rose, inventories rose more than expected. Imports grew, with buyers’ front-running to beat tariffs. Government spending fell, imports grew, and consumer sentiment weakened.
Employment and GDP numbers look fine on their own. However, market participants are worried about the impact of uncertainty and souring consumer sentiment. Slow growth and sticky inflation above 3% are the biggest risks to the economy.
The FOMC meets this Wednesday. We are not looking for any policy changes in this meeting. The Federal Reserve chair is positioning himself for a “wait-and-see” approach before making any policy decision. Chair Powell has talked about the stagflationary implications of tariff policies, so we’ll all have to “wait-and-see” how much that continues to factor into Fed decision-making.
CHANGES IN RATES
The Treasury market continues its wild rise with yields increasing across all tenors.
Muni yields came down significantly last week.
Ratios tightened in favor of Munis because of the rally in Munis last week.
Corporate yields followed Treasuries and were higher for the week.
Last week closed with China exempting about $40 billion worth of U.S. goods from tariffs. These included products like pharmaceuticals and industrial chemicals. This shows China’s willingness to negotiate with the United States.
In related news, President Trump has asked the Supreme Court to give DOGE access to Social Security, address, and financial information in an effort to increase efficiency. For now, the Supreme Court has blocked DOGE's access to this sensitive information.
The White House released a bubble chart illustrating proposed budget spending.
However, there is a big difference between a proposed budget and an actual budget. Right now, Republicans have dissension based on the treatment of SALT. The current cap at $10,000 is a contentious issue. The GOP still must resolve its tax bill. It is ultimately Congress that will determine the appropriation bills for 2026, which are, of course, subject to presidential approval.
The 5-year Breakeven Inflation Rate finished the week of May 2 at 2.31%, 9 basis points higher than April 15. This number has been slowly creeping over the last month. The 10-year breakeven inflation rate finished the week at 2.33%, which is 1 basis point lower than last week.
As of May 2, the 10-year quality spreads (AAA vs. BBB) were 0.94%, 7 basis points lower than our last report two weeks ago (based on our calculations). The long-term average is 1.69%.
However, investment grade is showing some movement at 1.12% while high yield is holding steady at 3.35%.
The spreads in corporate investment grade have lagged the rally in equity markets because of a robust supply calendar in May. Spreads are still tracking strong earnings reports by the companies and are not yet reflective of tariff uncertainties and negative GDP.
Money Market Flows (millions of dollars)
Overall, all money market funds were negative last week.
Mutual Fund Flows (millions of dollars)
Though still negative overall, cash flows out of bond funds slowed.
ETF Fund Flows (millions of dollars)
ETF asset classes saw a net decrease in inflows this week.
The supply of new municipal bond issues is expected to be closer to $14+ billion this week. This follows the last three weeks of a large calendar of $10+ billion.
Hard data continues to align with expectations: a solid job front and seasonal negative GDP numbers. However, soft data (or sentiment) has turned negative, with tariffs and uncertainty being the biggest contributors.
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