Landmark Election Year

WEEK ENDING 6/7/2024

• Wednesday doubleheader: CPI data release and Fed meeting.
• Strong labor market dampens probability of July rate cut.
• Landmark election year for the world.

A CITY DIFFERENT TAKE

This is an important week with two big macroeconomic events playing out. On Wednesday, we should see a CPI data release and the Federal Reserve’s rate decision meeting.

That meeting will most likely be colored by recent labor market numbers. Last Friday, nonfarm payrolls increased by 272,000, showing a strong labor market. Even though the unemployment rate moved from 3.9% to 4.0%, average hourly earnings increased by 0.4% month over month. The slight increase in the unemployment rate is most likely due to workers returning to the job market but not finding work.

The strong jobs market deals a blow to the probability of a rate cut in July. Fed easing expectations for 2024 have fallen 37 basis points as investors are now looking at the possibility of rate cuts in November. The rates market reacted to Friday’s jobs data with a higher rates rally, anywhere from ten to 15 basis points, causing the curve to flatten.

CHANGES IN RATES

Treasury rates moved lower on the week despite a strong jobs report and a late week rate rally.

Weeks before the summer seasonal drought, municipal yields recovered some of last week’s relative yield cession in what seemed to be the last of the $10+ billion supply.

The municipal/Treasury ratios decreased across the yield curve. The markets giveth, and the markets taketh away.

Corporate rates were moderately lower on the week.

THIS WEEK IN WASHINGTON

The United States isn’t the only country facing a polarizing 2024 national election. While Americans head to the polls in five months, more than 60 other countries are also participating in national elections this year.

Last week, we saw election results come out of India, the world’s largest democracy. Prime Minister Narendra Modi secured a third term, but with a much smaller margin of victory than predicted. Modi will now turn to other parties in his coalition, dealing a blow to the Bharatiya Janata Party’s ambitious political agenda for the term.

In France, President Emmanuel Macron suffered a defeat in the European Union parliamentary election by his far-right rival Marine Le Pen. While Macron himself was not on the ballot, it now becomes increasingly difficult for Macron to push his agenda. In response, Macron dissolved the lower parliament and called for a snap election. The decision is being described as a gamble for Macron, who could be opening the door for Le Pen to gain additional power if the move backfires.

WHAT, ME WORRY ABOUT INFLATION?

The 5-year Breakeven Inflation Rate finished the week of June 7 at 2.32%, four basis points lower than the close of May 31. The 10-year Breakeven Inflation Rate finished the week at 2.30%, five basis points higher than the close of May 31.

MUNICIPAL CREDIT

10-year quality spreads (AAA vs. BBB) as of June 7 were 0.97%, tighter by 14 basis points from the May 31 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 0.65%, down from the May 31 level. High-yield quality spreads were higher at 2.87%.

WHERE ARE FIXED-INCOME INVESTORS PUTTING THEIR CASH?

Money Market Flows (millions of dollars)

Money market funds saw increased cash flows in all classes.

Mutual Fund Flows (millions of dollars)

Bond fund categories saw mixed cash flows with a drop across all categories week over week.

ETF Fund Flows (millions of dollars)

ETF asset classes mixed negative cash flows.

SUPPLY OF NEW ISSUE MUNICIPAL BONDS

The supply of new issues is expected to be about $4.5 billion this week – a slowdown from recent activity.

CONCLUSION

This week, CPI data and the Federal Reserve meeting are expected to cause much volatility in the market. We think that the Fed will leave the target rate unchanged at 5.25%–5.50%. The job market remains hot to the touch, with unemployment inching up. Landmark elections for democracies around the world are leading to new political landscapes.

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