After guessing who the next president will be (or vice president, for that matter), the market's next best parlor game is guessing what the Fed will do at its upcoming meeting (September 17–18). The market has been very bad at this game; remember the six or seven cuts predicted in January? The following table shows the market’s implied Fed action probability and the cumulative Fed Funds rate change.
Some of the economic releases over the holiday-shortened period came in below expectations. Job openings in the JOLTS survey were 7.7 million versus expectations of 8.1 million; the average going back to January 31 is 5.6 million. (A problem with recency bias, perhaps?) That equates to 1.07 jobs for each person looking for one. That is well off the COVID-recovery high of 2.03 on March 1, 2021, but above the long-term average of 0.74 since January 1, 2004.
The big numbers for the week were Friday’s employment numbers. The unemployment rate was 4.2%, in line with expectations and below July’s rate of 4.3%. The change in non-farm payrolls was +118,000, below expectations of +140,000 but above July’s revised +74,000. There were major monthly negative revisions for the prior three months. The monthly average of jobs created since March 31, 2010 is 158,000. This trend is problematic, but all of the other economic indicators we follow point to a stable economy. This week we wait for CPI and PPI.
CHANGES IN RATES
Treasury yields were lower on the week, led by the short end of the curve. The big news, at least for us fixed-income types, is that the Treasury yield curve's inversion ended Friday. The 2-to-10-year Treasury spread ended the week ending September 6 at +0.06%, up from -0.02% on August 23. This is an important milestone. The slope of the 2-to-10-year Treasury curve is a long way from the average 1.10% slope.
Municipal yields were lower last week. The ratio table below highlights the relative differences. Even though the inversion in the Treasury curve ended this week, the municipal yield curve ended its inversion weeks ago. We don’t get to say this very often. Yes, fans, the municipal market led the Treasury market into a more normal yield curve environment.
Municipals, as measured as a ratio versus their Treasury equivalent maturities, were generally slightly higher over the week.
Corporate yields were lower over the week, led by the short end of the market.
Various polls show that the presidential race has “no clear leader” at this point.
“A new CNN Poll of Polls including polls conducted since the Democratic National Convention finds a tight race with no clear leader between Vice President Kamala Harris and former President Donald Trump.”
This sets the stage for a very eventful debate Tuesday night. Some of the topics we expect to see covered are Vice President Harris’s softening stance on economic policies, which is quite different from President Biden’s. The candidates’ stances on women’s health. And given last week’s horrific Georgia school shooting — the 45th school shooting of 2024 — guns.
Congress is back after a six-week recess—nice work if you can get it. A government shutdown is looming, and the House Republicans rolled out a six-month stopgap plan known as a continuing resolution. Spoiler alert: There is skepticism about whether the strategy will succeed.
The 5-year Breakeven Inflation Rate finished the week of September 6 at 2.20%, five basis points lower than the close of August 23. The 10-year breakeven inflation rate finished the week at 2.03%, 10 basis points higher than the close of August 2.
As of September 6, 10-year quality spreads (AAA vs. BBB) were 1.00%, two basis points higher than the August 23 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 0.91%, eight basis points higher. High-yield quality spreads were 11 basis points higher at 3.16%.
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 28.
ETF Fund Flows (millions of dollars)
ETF asset classes experienced increased cash flows overall.
The supply of new issues is expected to be about $15 billion this week. Look out below!
The fixed income markets are waiting on the Fed (like Godot). It has been waiting for the Fed all year, so much so that we are tired of using this analogy. By our way of thinking, the Fed does not have to do much. Yes, the Fed Funds rate is restrictive and could be lowered, but the economy has not been sensitive to short-term interest rate rises, so why would it be sensitive to short-term interest rate declines? The job numbers and trends are problematic, but would lower short-term rates help? When your only tool is a hammer, everything looks like a nail. Who would want all the grief that lowering rates before a presidential election would invoke? This may pressure the Fed’s independence if a certain candidate wins.
Anyway, a well-known market prognosticator once cautioned that one should forecast the direction of the market or the timing of changes, but never at the same time. Our forecast is that the Fed Funds rate will decrease.
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