This is a big week for the markets. Potentially, the Federal Reserve will shift its policy from hold to cut, as noted by Powell’s Jackson Hole speech. If that happens, we will enter a rate-cutting cycle. The market has all but decided that this Fed meeting will result in a cut. So the bigger question is how much will that cut be. Currently, there is nearly a 50% chance of a 50-basis-point rate cut.
Case for a 25-basis-point rate cut.
Case for a 50-basis point rate cut.
Last Thursday, it was reported that PPI rose by 0.2% headline and 0.3% core in August. The annual increases in headline and core were 1.7% and 2.4%, respectively. Core CPI inflation was up 0.3% in August and 3.2% year over year. Even though the CPI is slightly higher than expected because of shelter costs, these numbers have been range-bound for several months now and are consistent with the Fed’s inflation target.
CHANGES IN RATES
Treasury yields were lower on the week, led by the short end of the curve. The un-inversion of the Treasury and muni curves continues, but both curves are a long way from normal.
The municipal curve moved marginally last week.
Municipals, as measured as a ratio versus their Treasury equivalent maturities, were higher over the week.
Corporate yields were lower over the week, led by the short end of the market.
Last week was the first presidential debate between Vice President Harris and former President Trump. The debate was fiery and thoroughly entertaining. CNN released a poll showing 54% of those surveyed said Harris won the debate, while 31% said Trump was the victor. Trump has said there will be no third debate.
Immediately after the debate, pop superstar Taylor Swift formally endorsed Harris via Instagram post. Swift’s endorsement has already had a large impact on the “get out the vote” movement—voter registration increased by 400%.
Another assassination attempt against former President Trump happened Sunday at his Florida golf club. The impact of this second attempt on the election seems to be muted for now.
In world news, the U.S. is concerned that Russia is sharing information and technology with Iran, which could lead to Iran building nuclear weapons. It appears that the information exchange is in hopes of Russia procuring missiles from Iran for its war in Ukraine.
The 5-year Breakeven Inflation Rate finished the week of September 13 at 2.21%, one basis point higher than the close of September 6. The 10-year breakeven inflation rate finished the week at 2.08%, five basis points higher than the close of August 10.
As of September 14, 10-year quality spreads (AAA vs. BBB) were 0.94%, six basis points tighter than the September 6 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 0.92%, one basis point higher. High-yield quality spreads were two basis points higher at 3.18%.
Money Market Flows (millions of dollars)
Overall, money market funds saw increased cash flows. Tax-exempt and Prime funds saw a decrease in flows from the week prior.
Mutual Fund Flows (millions of dollars)
Bond fund categories’ cash flows were mixed for the week reporting September 11.
ETF Fund Flows (millions of dollars)
ETF asset classes all experienced an outflow.
The supply of new issues is expected to be about $5.4 billion this week. This is much lower than the weeks before, mostly because of the Fed meeting this week.
This is a big week and a big upcoming meeting for the Fed — not just because of the magnitude of the assumed rate cut but also in the guidance we’ll receive from the Fed and their decision. The market is wagering a cut anywhere from 25 to 50 basis points. Inflation is on target based on CPI and PPI data released last week. The municipal and Treasury curves maintain “un-inversion” for a second week in a row. However, both curves are a long way from being normal.
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