The Federal Reserve met this week and held rates steady.
Renowned “Fed Whisperer” Nick Timiraos termed Jerome Powell’s approach to inflation and rate cuts as “trust but verify.” The economic data for the week seemed to test this resolve, at least in the market’s eyes. Year-over-year core CPI came in below estimates and last month’s report (3.4% vs. 3.5% and 3.6%, respectively). That was followed by similar declines in core PPI (2.3% vs. 2.5% and a revised 2.5%, respectively).
Finally, jobless claims surprised the market with a 242,000 increase, topping the last reading of 229,000 and expectations of 225,000. Continuing claims were also elevated. The fixed income markets rallied on this data, and expectations of Fed rate cuts increased.
This would be a good time to remind readers that the market has overestimated future Fed rate cuts in the past year. Here is a table showing the market’s expectation of rate cuts over the last year.
We are still in the “higher-for-longer” camp, but are very sensitive to incoming data.
Treasury rates moved lower on the week. Recent economic data suggest a softer economy. The next PCE reading should act as confirmation of this.
Municipal yields were lower last week but did not react as much as the yields in the Treasury market.
The municipal/Treasury ratios increased in all maturities except in the 1-year range.
Corporate rates were moderately lower on the week.
President Biden attended the G7 meeting last week, and for the first time ever, so did the Pope. Prior to meeting global political leaders, the Pope first met with more than 100 comedians from around the world. Does anyone else see any similarity between the two meetings?
Meanwhile, Hunter Biden was convicted of lying on a federal form related to purchasing a gun. We’re still waiting to hear the matching cries of a “two-tiered judicial system” or a “rigged trial.” With sentencing still to come, we heard the president express his love and support for his son and publicly decline pardoning or commuting his son's sentence. There are very striking differences in these two approaches.
The Supreme Court ruled that the ban on bump stocks was not constitutional because they do not make semi-automatic weapons into machine guns. This was understandably alarming to some mass shooting survivors.
The 6-3 majority opinion stated that the ATF was not authorized to ban bump stocks. In a separate opinion, Justice Alito stated “that has to happen through action by Congress, not through regulation.”
In a dissent, liberal Justice Sonia Sotomayor wrote that “the ruling would have "deadly consequences," saying the court's majority cast aside the will of Congress to embrace an "artificially narrow definition" of a machine gun, allowing gun users and manufacturers to circumvent the law.”
And in more SCOTUS news, last week, more revelations emerged about the Justices' gifts from wealthy “friends.” Is the Supreme Court now the highest court money can buy? That wasn’t addressed in their non-binding non-enforceable code of conduct.
As the presidential election approaches, this portion of our weekly commentary will become harder to write. Not because of a lack of material. But because sifting through the volume and absurdity of headlines and articles will be a daunting task. We will persevere and hope to find some highlights and humor among the tears.
The 5-year Breakeven Inflation Rate finished the week of June 14 at 2.23%, which was lower by nine basis points from the close of June 7. The 10-year Breakeven Inflation Rate also finished the week at 2.14%, 13 basis points higher than the close of June 7.
As of June 14, 10-year quality spreads (AAA vs. BBB) were 0.96%, tighter by one basis point from the June 7 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 marginally higher at 0.69%. High-yield quality spreads were higher at 3.05%.
Money Market Flows (millions of dollars)
Money market funds saw positive cash flows in all classes.
Mutual Fund Flows (millions of dollars)
Bond fund categories saw mixed cash flows.
ETF Fund Flows (millions of dollars)
All ETF asset classes had positive cash flows.
The supply of new issues is expected to be about $6.9 billion this week – more moderate than in some of the more recent weeks past.
This week, the higher-for-longer view of Fed policy came under pressure. At this time, it is not enough to cause us to change our strategic duration positioning in the neutral range for our SMAs, but it does make us more sensitive to changing financial conditions.
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