Another Turkey Drop?

WEEK ENDING 8/16/2024

• Won’t you please come to Chicago for the Democratic National Convention?
• Or please come to Jackson Hole for a sign.
• “As God is my witness, I thought turkeys could fly.”

A CITY DIFFERENT TAKE

This week, we saw stable PPI and CPI inflation releases. Both core Y/Y numbers came in at or below expectations and below June’s reading. This was a relief to the stock market which continued its recovery from the distress of Monday, August 9. Many pundits like The Wall Street Journal’s Nick Timiraos feel a September rate cut is close to a sure thing.

“With a near-inevitable rate cut, attention at that meeting will shift to whether the decision to cut rates is unanimous, and how much policymakers expect to keep lowering borrowing costs.”

 Pundits think a rate cut is a sure thing, but the Federal Reserve and Chair Powell have consistently stated they are “data dependent.” That data will include more inflation reads and job reports before the September Fed meeting. Just to put a little math behind this observation, we check Bloomberg's World Interest Rate Probability (WIRP) function, which called for an August 16 close-of-business implied probability of 130.6% and a cut of 0.327%. This splits the proverbial baby between a 0.25% and 0.50% cut.

We don’t know if it’s the fact that I and K are so close in the alphabet, but the WIRP recalls the famous “WKRP in Cincinnati” episode “Turkey Drop,” which featured the radio station tossing live turkeys from a helicopter down to listeners below during a Thanksgiving promotion, thinking they could fly. They cannot. Hopefully, investors waiting for a September rate cut will not witness a similar result. “Oh, the humanity.”

CHANGES IN RATES

Treasury yields were lower during the volatile week, and the yield curve became slightly more inverted. The two-year and 10-year Treasury spread ended the week of August 9 at -0.11% (-0.17% the previous week).

Municipal yields were mostly lower last week, verging on “unchanged.” The ratio table below highlights the relative differences.

Municipals, as measured as a ratio versus their Treasury equivalent maturities, were, for the most part, higher over the week.

Corporate yields were slightly lower over the week.

THIS WEEK IN WASHINGTON

The nation’s eyes turn to Chicago next week as the Democratic National Convention is set to embrace the Kamala train. This past week, Harris gave a speech highlighting her proposed economic policies, focusing on grocery prices. Forbes reported:

“Grocery Prices: The candidate would work in her first 100 days to help Congress pass a national ban on ‘price gouging’ for food and groceries, as well as give the Federal Trade Commission and prosecutors authority to go after companies they determine price gouge, support small businesses in the industry, take a closer look at mergers between big grocery companies and ‘aggressively’ investigate price-fixing in meat supply chains specifically.” 

Some have painted this excerpt as a prelude to price controls, which sickens any capitalist. The known economic periodical New York Post ran the headline “Harris’ price control ‘Kamanomics’ plan risks scaring away Wall Street donors on the fence” in a piece written by Charles Gasparino.

Jackson Hole, Wyo. (far from Washington, D.C.) will also capture attention as the Fed holds its annual economic glamping extravaganza. Investors will be especially attuned to Chair Powell’s speech, searching for hints of upcoming Fed actions. We think that, like many of these meetings, investors will speculate (it is never good to take investment actions on speculation), and many will be disappointed.

Speaking of disappointments, Secretary of State Anthony Blinken is on his way to the Middle East to seek a Gaza ceasefire agreement. Hopefully, it will happen this time. 

WHAT, ME WORRY ABOUT INFLATION?

The 5-year breakeven inflation rate finished the week of August 9 at 2.24%, five basis points higher than the close of August 2. The 10-year breakeven inflation rate finished the week at 2.10%, six basis points higher than the close of August 2.

MUNICIPAL CREDIT

As of August 16, 10-year quality spreads (AAA vs. BBB) were 0.97%, two basis points lower than the August 9 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 0.81%, seven basis points lower. High-yield quality spreads were 16 basis points lower at 3.08%.

WHERE ARE FIXED-INCOME INVESTORS PUTTING THEIR CASH?

Money Market Flows (millions of dollars)

Overall, money market funds saw increased cash flows.

Mutual Fund Flows (millions of dollars)

Bond fund categories cash flows were mixed for the week reporting August 7.

ETF Fund Flows (millions of dollars)

ETF asset classes experienced increased cash flows overall.

SUPPLY OF NEW ISSUE MUNICIPAL BONDS

The supply of new issues is expected to be about $11.7 billion this week.

CONCLUSION

This past week has been one of relief. Most markets recovered from the distress experienced earlier in the month. There is significant anticipation about Chair Powell’s Jackson Hole speech and the signals it might hold for a hopeful start of a September rate-cutting regime. We think the markets might be setting themselves up to be fooled again. Our thoughts are that the Fed will continue its data dependency and begin cutting rates when inflation and the employment picture align. There are still a couple of inflation and employment reports coming out before the Fed’s September meeting that might gum up the works. Our strategy hasn’t changed – stay the course!

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