Weekly Market Update

Monday, July 10, 2017

FOMC minutes assess the pause in inflation indicators to be temporary. Nonfarm payroll (NFP) reported robustly at 222,000 new jobs, well ahead of 178,000 expected, along with an upward revision of 44,000 to the prior month. The rise in the U-3 unemployment rate to 4.4% from 4.3% (the lowest rate since 2001) gives a fresh look at the recently protracted run of sluggish wage growth. Moreover, the uptick in the Labor Force Participation Rate (LFPR) to 62.8% from 62.7% supports that a strong NPF coupled with rising U-3 unemployment means the ranks of job-seekers have been growing faster than anticipated, thus for now holding wage growth in check. Indeed, this is a welcome development from the Fed’s perspective. Perhaps having attributed more of the sharp decline in the LFPR from 66.4% (pre-2008) to an aging workforce than to the cyclical aspects of a recession, the new rise in the LFPR validates the Fed’s long-running “lower for longer” dovish stance by facilitating yet deeper recovery from protracted labor market slack. The standing consensus among the majority of voting Fed members (estimated 6-3) appears to be one more hike in 2017, the Fed’s balance sheet to begin unwinding in the fourth quarter of 2017, and up to three additional rate hikes in 2018.

European Central Bank (ECB) commentary suggests that quantitative easing may curtail more quickly. In a clear reversal to their recent stance that stimulus buying would continue as needed into the near future, global fixed-income markets responded in earnest with some long-end yield curve steepening. With the majority of foreign central banks signaling some level of anticipated course change in their respective policies (raising target rates or slowing of debt-buying programs), upward movement in long-term yields is precisely the “market-based inflation expectation” response the Fed has been hoping for. Apart from potentially disruptive protectionist trade developments, the Fed’s shift away from baseline accommodative policy may be implemented with better currency rate stability than would have been the case (as recently as last year) in competition with the goals of the other major central banks.

Municipal yields drifted upward with Treasury yields in the low-supply holiday week. Unchallenged with the lightest $1.2 billion new-issue calendar in 2017 and awash in the second-highest seasonal cycle of bond redemptions, the softening of municipal yields reflected a high level of undistributed dealer inventory from the prior week coupled with a sentiment toward higher long-term rates. New-issue volume for the coming week returns to a full pace at $10.2 billion, dominated by large East Coast issuer names. Although July is typically a month of strengthening fundamentals (slowing issuance and high reinvestment), the market sentiment of ending accommodative monetary policy coupled with mixed (but still considered supportive) indications of sustainable recovery sets the stage for price and yield discovery that balances long-term rate expectations and a still large pool of un-invested cash ready to re-enter the market.

The 10- and 30-year Treasury yields closed the week at 2.39% and 2.93%, respectively, up slightly from 2.31% and 2.84%% last Friday. The 10- and 30-year AAA MMD closed at 2.05% and 2.85%, respectively, higher from 1.99% and 2.79% last Friday. SIFMA reset on Wednesday at 0.86%, down from 0.91% the prior week.

The Bond Buyer 30-day visible supply is at $11.5 billion, with $10.2 billion ($8 billion negotiated) expected to come during the week. The calendar is anticipated to pick up significantly following the holiday week, with 21 deals over $100 million expected to come to market. Janet Yellen will deliver her semiannual monetary policy report to Congress this coming Wednesday and Thursday. Investors will also focus on market technical data such as the EIA petroleum status report, jobless claims, producer price index, consumer price index, retail sales, industrial production, and the release of the Fed Beige Book.

Reference Sources: The Bond Buyer, CNBC, Reuters, Bloomberg, The Wall Street Journal, SIFMA, Municipal Market Analytics, and Municipal Market Data.

  7/7/2017 Change*
SIFMA 0.86% -5
LIBOR 1.23% 0
AAA Municipal Market Data Rates 
5-Yr. 1.37% 2
10-Yr. 2.05% 6
20-Yr. 2.71% 6
30-Yr. 2.85% 6
U.S. Treasury Rates
10-Yr. 2.39% 8
30-Yr. 2.93% 9
Municipal to Treasury Yield Ratios 
10-Yr. 85.8% -0.4
30-Yr. 97.3% -1.0
Dow Jones 21,414 65
S&P 2,425 2

*Change since 6/30/2017
Sources: Bloomberg Information Systems and Thomson Financial

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The information in this material was prepared by non-research personnel of William Blair & Company, L.L.C. The material is not a research report and was not prepared by the research department of the firm. William Blair does not publish fixed income research. The views expressed are those of the Debt Capital Markets Group and may differ from the views of others at William Blair, including William Blair Research or William Blair Investment Management. William Blair's trading desk may deal as principal in or act as a market maker for issuers discussed herein. The accompanying information was obtained from sources which William Blair believes to be reliable but does not guarantee its accuracy or completeness. The material has been prepared solely for information purposes and is not a solicitation of an offer to buy or sell any security or instrument or to participate in any trading strategy. Historical data is not an indication of future results. The opinions expressed are our own unless otherwise stated.

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