Capital markets weekly digest

Retail therapy: Hot retail sales in March demonstrate ongoing consumer strength, adding to the "higher-for-longer" interest-rate narrative.

Prevailing volatility: Treasury yields faced fresh bouts of volatility with the 10-year benchmark experiencing its biggest one-day rally of the year and a new YTD high in the same week.

Investor repositioning: Market participants seeking additional relative value rotated from Agency CMBS into other like-investment grade products, causing credit spreads to leak wider this past week.

Market Insights:

Robust spending despite pricing pressure: Despite inflation rising, consumer spending remained resilient. March Retail Sales surpassed expectations at 0.7%, with February’s figures revised upward to 0.9%. This spending resilience, even amidst higher interest rates, continues to weigh on stubborn inflation. Some bank quarterly earnings reports indicated the fastest wage growth since early 2023, reflected by both low and high earners. Additionally, subdued weekly unemployment claims further confirmed a robust labor market, with the four-week moving average of initial jobless claims holding steady at 214,500 for the past three weekly readings. These factors supported arguments for maintaining higher interest rates until inflation consistently trends downward to the Fed's 2% target. While the Fed Beige Book noted modest economic growth across districts, a host of Fed speakers hinted throughout the week that achieving 2% inflation might take longer than expected. Ultimately, it appears the Fed will await clearer data trends before considering any adjustments to interest rates.

Treasury markets rollercoaster ride: The hot retail spending report and Federal Reserve member's speeches essentially reiterating their “higher for longer” mantra for interest rates. This helped launch the U.S. 10-year Treasury yield to reach a new intraday YTD high of 4.69% last week. Markets have dramatically lowered the odds of a rate cut happening this summer with the CME FedWatch Tool at week's end projecting a 66% chance of the first rate cut commencing in September. An attack on Friday, April 19th, caused tensions to rise between Israel and Iran at the end of the week. This temporarily prompted investors to pour into safe-haven assets as the 10-year Treasury yield fell by roughly 14 bps intraday before climbing back up to close the week at 4.62%.

Credit spreads widened given investor rotation: There was a notable repositioning in investment strategy for numerous fixed-income investors this past week. Traders noted that in the secondary market there was an elevated degree of selling, approx. $4 billion, in seasoned Agency CMBS (Fannie, Freddie, and Ginnie) paper, which is 4-5x the weekly average. The primary motivation for the selling activity was to finance the purchase of residential MBS, AAA corporate debt, and other like investments grade debt instruments that carried more attractive spreads. This resulted in new issuance investor/credit Agency spreads widening out from the beginning of last week by ~2-4 bps. New issuance volumes saw an uptick as well with approx. $658 million trading last week, with the most interest centered towards larger-sized ($20 million+), standard structured opportunities. As investors adjusted their positions, the pricing differential between larger loans and smaller loans has widened to include additional premiums of +5-10 basis points on small loans. While the selling rotation appears to be manageable so far, it is not unusual to see investor spreads continue to widen in the primary issuance space given the recent surplus of Agency CMBS inventory on broker/dealer shelves.

Economic Events (Week of 04.22.2024 - 04.26.2024):

This week, the Federal Reserve blackout period will keep Fed officials muted to avoid swaying markets before the April 30th - May 1st FOMC meeting conclusion. As a result, markets will be glued to the release of first-quarter GDP and March Personal Consumption Expenditures (PCE) data towards the end of the week. The initial reading of GDP for the first quarter of 2024 is anticipated to show that the growth of the economy cooled to a pace of 2.50%. A pickup in March on the average hourly earnings from a month-over-month basis and a strong Nonfarm Payroll report have purported market consensus to anticipate a rise in personal income for March to reach 0.50%, while Personal Spending moderates to 0.60%. Personal Spending and Income may play a role in fueling inflation as headline yearly PCE inflation is projected to elevate to 2.60%. However, the annual pace of Core PCE, the Fed’s preferred measure of inflation, is expected to regulate to 2.70%. The monthly pace from a headline and core perspective is anticipated to remain at 0.30% for the second consecutive time. Should core PCE inflation come in lower than projected, it may improve expectations surrounding rate cut timing and aid in relieving the recent run-up in Treasury yields.

Economic Calendar:

04/23: Tuesday:

o Apr Preliminary S&P Global US Manufacturing PMI (Est. 52.0, Prev. 51.9)

o Apr Preliminary S&P Global US Services PMI (Est. 52.0 Prev. 51.7)

o Mar. New Home Sales (Est. 669K, Prev. 662K)

o $69 billion 2-Year Treasury Note Auction

04/24: Wednesday:

o Mar. Preliminary Durable Goods Orders (Est. 2.50%, Prev. 1.30%)

o $70 Billion 5-year Treasury Note Auction

04/25: Thursday:

o Q1 GDP Annualized QoQ (Est. 2.50%, Prev. 3.40%)

o Initial Jobless Claims for the week of April 20th(Est. 215K, Prev. 212K)

o Continuing Claims for the week of April 13th(Est. 1815K, Prev. 1812K)

o $44 Billion 7-year Treasury Note Auction

04/26: Friday:

o Mar. Personal Income (Est. 0.50%, Prev. 0.30%)

o Mar. Personal Spending (Est. 0.60%, Prev. 0.80%)

o Mar. PCE Deflator MoM (Est. 0.30%, Prev. 0.30%)

o Mar. PCE Deflator YoY (Est. 2.60%, Prev. 2.50%)

o Mar. PCE Core Deflator MoM (Est. 0.30%, Prev. 0.30%)

o Mar. PCE Core Deflator YoY (Est. 2.70%, Prev. 2.80%)