- Recent headline data support the soft-landing narrative: payrolls grew by $187K in August, consumer spending rose by .8% in July, and core PCE increased by .20%. Each report's details suggest that consumption and growth will slow since July's spending boom has passed. As we also saw, job openings are declining, and hourly wages are growing at their slowest pace since 2/22. The bottom line is that the economy is starting to slow, and the FED will report on this at the upcoming meeting.
- Consumers' urgency to spend on many things, including discretionary services, will decline in the fall and winter, setting the stage for slower growth. I am not suggesting we won’t see another move in rates; however, all these factors should contribute to a “cautious” FED as we move through the balance of this year. FED should comment on this as we get through the next few meetings.
- Goldman recently stated that they see a 15% chance the US will slide into recession, down from 20% as previously reported. They indicate the FED may not need to raise rates further this year and into the next. They also see the "drag" from policy tightening continuing to diminish before vanishing entirely in 2024. Goldman is typically well respected in our community; I suspect others will “pile on" to the notion that we will most likely see a "soft landing" in 2024.
- Fund flows turned negative last week as investors withdrew $636MM from MUN bond funds. We have seen small outflows before (around 3MM) and large inflows. I suspect this has happened due to the 4.60% paper trading out there and investors moving money into individual bonds compared to funds. Paper has gotten cheap again; this would be a better buy time than selling.
- The government’s two main measures of US economic activity accelerated in the 2nd Q, reinforcing the picture of a resilient economy. We have been discussing this point for quite some time. Another rate hike will happen. I thought it would be in September; however, many, including me, believe it will be in October. The hike should be the last, and the FED will indicate this. Rates will not move down (FED Fund rates) until mid-2024 unless we see a black swan. Yields are attractive here, and buyers know this. Many, including me, thought the hike would be in September; now, we believe it will be in October.
Bottom line, yields are +20bps out long and +15bps in the short term. We are buyers in the High-Grade sector at these levels. Credits are strong, and this should be a good entry point with yields moving up.
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