May 24, 2024

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Rally ensues post-jobs data; $10B on tap led by Illinois

10 min read
Rally ensues post-jobs data; B on tap led by Illinois

All markets rallied on the weaker jobs data, leading municipals to see yields fall up to eight basis points on what typically is a quiet Friday session, following a better-performing U.S. Treasury market. Equities closed in the black.

The softer-than-expected April employment report led to some analysts believing this could put rate cuts back on the table sooner, while others were not convinced.

“Treasuries rallied hard, led by the front-end of the curve, with 2s dropping as much as 15bp on the day, before paring losses,” said Michael Brown, senior research strategist at Pepperstone.

However, he pointed out, the labor market “cooling” was “by no means extreme.”

And while the markets dovishly repriced monetary policy expectations “a significant portion of this repricing likely owed to the overly hawkish nature of pricing prior to the payrolls number, resulting in positions being unwound as the data dropped,” Brown said.

U.S. Treasury yields fell up to eight basis points while the 10-year closed the session at 4.50%. Triple-A yields fell by five to eight basis points leading to ratios mostly holding at recent levels.

The two-year muni-to-Treasury ratio Friday was at 65%, the three-year at 64%, the five-year at 62%, the 10-year at 61% and the 30-year at 83%, according to Refinitiv Municipal Market Data’s 3 p.m. EST read. ICE Data Services had the two-year at 64%, the three-year at 63%, the five-year at 61%, the 10-year at 61% and the 30-year at 81% at 3:30 p.m.

A supply surge hits the market next week as The Bond Buyer 30-day visible bond volume ticks in at $17.67 billion, $10 billion of which will come the first full week of May.

“The remarkable resilience of the tax-exempt market over the last four months should lead to an accelerated rally once the Treasury market turns around,” noted BofA Global Research in a weekly report. “We attribute yield rises in April almost entirely to the Treasury market selloff.”

As the summer approaches, “it remains to be seen how much muni ratios can improve in the upcoming rally now that supply/demand conditions in the summer are stronger,” BofA said. “We believe a retest of early January lows is quite possible.”

Summer redemptions “are not far away, and investors will start positioning for net negative issuance relatively soon,” noted Barclays PLC in a weekly report. “To dampen the mood slightly, we expect redemptions to decline again this year” while “supply will likely be quite heavy in summer and early fall, as many issuers will try to place their deals prior to the November elections.”

“As a result, net negative summer supply is likely to be lower than in the past, and, as a result, it should be less of a driver of municipal performance,” Barclays said.

AAA scales
Refinitiv MMD’s scale was bumped up to eight three basis points: The one-year was at 3.32% (-8) and 3.14% (-6) in two years. The five-year was at 2.78% (-5), the 10-year at 2.85% (-5) and the 30-year at 3.86% (-7) at 3 p.m.

The ICE AAA yield curve was bumped up to five basis points: 3.34% (-5) in 2025 and 3.16% (-5) in 2026. The five-year was at 2.79% (-5), the 10-year was at 2.76% (-5) and the 30-year was at 3.83% (-5) at 3:30 p.m.

The S&P Global Market Intelligence municipal curve was bumped up to seven basis points: The one-year was at 3.36% (-7) in 2025 and 3.13% (-7) in 2026. The five-year was at 2.75% (-7), the 10-year was at 2.74% (-6) and the 30-year yield was at 3.84% (-7), according to a 3 p.m. read.

Bloomberg BVAL was bumped up to eight basis points: 3.38% (-6) in 2025 and 3.18% (-6) in 2026. The five-year at 2.72% (-5), the 10-year at 2.70% (-5) and the 30-year at 3.86% (-8) at 3:30 p.m.

Nonfarm payrolls
The report “does not appear likely to be a game-changer in terms of the policy outlook. Progress on inflation remains the key determinant of when the first Fed cut will be delivered,” Brown added, but “does perhaps hint at the first signs of the labor market beginning to cool, albeit not to anywhere near enough of a degree to warrant a policy response at this moment in time.”

“Markets are rallying furiously on the news,” according to Scott Anderson, chief U.S. economist and managing director at BMO Economics. “The 10-year Treasury yield is down about 9 basis points while the S&P 500 has opened about 1% higher.”

The report was “very Fed-friendly” and “light on almost every measure of labor market conditions, putting Fed rate cuts for 2024 back on the table,” he said. “We believe these job numbers are right in the sweet spot for the soft-landing scenario the Fed has been hoping for, raising the odds of a September rate cut.”

The Federal Reserve’s rate hikes are “having the desired effect,” Anderson said, “and a soft-landing outcome for the economy appears a lot closer than many thought.”

Still, Chris Low, chief economist at FHN Financial, said the numbers were “a far cry from the kind of labor market weakness that would prompt a Fed rate cut,” but “more abundant labor and slower job and wage growth should help contain inflation, and that is the key to rate cuts. Hence, odds of a September rate cut have climbed well over 50% and bond yields are down from 7bp at the long end to 10bp in intermediate coupons.”

While weather “plays havoc with seasonal adjustment,” he said, “this was a bond-friendly report, even taking seasonal anomalies into account.”

The jobs numbers “will hush the hawkish undertone in the market and any recent stagflation fears,” said Alexandra Wilson-Elizondo, co-CIO of multi asset solutions at Goldman Sachs Asset Management. “We continue to look through the debate around timing of cuts to the fact that the data, in aggregate and observed over a longer time period, will drive a non-recessionary cutting cycle. This should be positive for risk assets and bonds.”

But Wilson-Elizondo warned the easing will be slower than the tightening cycle was.

The Fed will see this as “good news,” said University of Central Florida Economist Sean Snaith. “The labor market is starting to show some impact from high interest rates, and it’s moving in the right direction to reach the Fed’s inflation target.”

The labor market softening suggested by the data “provides some cover for the Fed to potentially cut at some point this year,” said Nancy Tengler, CEO and CIO of Laffer Tengler Investments.

But, as in the 1990s, she said, productivity will be a positive factor, despite Thursday’s report that showed it slowed last quarter. “Whether the Fed cuts rates or not we believe the bull market is intact,” Tengler said.

“This report offered welcome relief for bond investors after a string of upside surprises for both growth and inflation over the past four weeks,” said Paul Mielczarski, head of global macro strategy at Brandywine Global.

“Moderation in employment growth together with softer wage growth revives prospects for Fed rate cuts in the coming months,” he said.

Still, the volatility in payrolls data means “a June rate cut likely is off the table,” Mielczarski said. “But if the next two inflation prints are softer, the Fed could realistically start cutting rates in July.”

One report “does not change policy,” noted Giuseppe Sette, president of Toggle AI, “especially when it is so volatile as nonfarm payrolls.” He still expects no rate cuts this year.

Olu Sonola, Fitch Rating head of U.S. economic research, agreed. “One month does not make a trend, so the Fed will likely need to see a few months of this type of moderation coupled with better inflation numbers to put rate cuts back in play sooner than later.”

Christian Scherrmann, DWS U.S. economist, also noted the volatility of employment. “Therefore, it remains far from certain if April’s numbers indicate the start of the last mile of labor market normalization.”

Still, he said, the Fed will like the lower wage growth “as it certainly eases pressure on the recent disinflation discussion.”

And while this week’s Federal Open Market Committee meeting showed the panel is “are in no hurry to cut rates given the persistence of higher inflation,” Mortgage Bankers Association VP and Deputy Chief Economist Joel Kan said, this report could “give them some leeway” if the labor “market continues to weaken and if inflation trends start to follow.”

The report “is not enough to provoke the Fed into any kind of imminent preemptive policy action, in our view,” said Yelena Shulyatyeva, senior U.S. economist at BNP Paribas.

While none of the numbers were “terrible,” ING Chief International Economist James Knightley, said, “but it is the first time we have seen every part of the report come in weaker than expected for a very long time.”

A September rate cut remains his call. “To deliver it I think we need at least three 0.2% or below month-over-month core inflation prints and the unemployment rate getting above 4% to perhaps 4.2%.”

The drop in jobs created and softer earnings “should give markets some hope that inflation is not as sticky as feared and raises the possibility of getting back on the disinflation trend we saw last year,” according to Matt Peron, global head of solutions at Janus Henderson Investors.

If the softness is confirmed, he said, it would allow consideration of rate cuts this year.

“This report is exactly what the Fed wants to see: Fewer jobs added and weaker wage growth,” said Wells Fargo Investment Institute Senior Global Market Strategist Scott Wren.

WFII expects two rate cuts this year.

“The softening trend in labor markets will make it easier for the Fed to cut rates,” said Brian Rose, senior U.S. economist at UBS Global Wealth Management. UBS sees tamer inflation in the months ahead, “creating conditions that would allow the Fed to start cutting rates in September. In our investment strategy, we maintain a preference for quality bonds.”

Primary to come:
Illinois (A3/A-/A-/) is set to price Wednesday $1.8 billion of GOs, consisting of $250 million of taxables, Series of May 2024A, and $1.55 billion of Series of May 2024B. Jefferies.

The Illinois Finance Authority (Aa2/AA-/AA+/) is set to price next week $947.43 million of the University of Chicago revenue bonds, consisting of $484.625 million of Series 2024A and $462.805 million of Series 2024B. RBC Capital Markets.

Columbus, Ohio, (Aaa/AAA/AAA/) is set to price Thursday $467.455 million of various purpose GOs, consisting of $293.755 million of unlimited tax bonds, Series 2024A; $22.29 million of limited tax bonds, Series 2024B; $76.72 million of taxable unlimited tax bonds, Series 2024C; $15.385 million of taxable limited tax bonds, Series 2024D; and $59.305 million of unlimited tax refunding bonds, Series 2024-1. J.P. Morgan.

The Chandler Industrial Development Authority, Arizona, (A3/A-//) is set to price Tuesday $437.885 million of AMT Intel Corp. Project industrial development revenue bonds, Series 2019. J.P. Morgan.

San Francisco (Aaa/AAA/AAA/) is set to price Thursday $345 million of GO refunding bonds, Series 2024-R1, serials 2025-2036. Stifel.

The San Diego Unified School District (Aa2//AAA/AAA/) is set to price Tuesday $309.14 million of GO refunding bonds. Jefferies.

Energy Northwest (Aa1/AA-/AA/) is set to price Wednesday $266.460 million of electric station revenue bonds, consisting of $189.94 million of Project 1 refunding bonds, Series 2024-B, serials 2025-2027; $9.595 million of Columbia Generating Station bonds, Series 2024-B, serial 2031; and $66.925 million of Project 3 refunding bonds, Series 2024-B, serial 2028. Wells Fargo.

The New Jersey Health Care Facilities Financing Authority (A1/AA-//) is set to price Thursday $256.055 million of RWJ Barnabas Health refunding bonds, Series 2024B. Jefferies.

The Virginia Housing Development Authority (Aaa/AAA//) is set to price Tuesday $240 million of commonwealth mortgage bonds, consisting of $80 million of non-AMT bonds, 2024 Series E, Subseries E-2, serials 2025-2036, terms 2039, 2044, 2049, 2054; and $160 million of taxables, 2024 Series B, serials 2025-2034, terms 2039, 2044, 2049, 2054. Wells Fargo.

The Metropolitan Atlanta Rapid Transit Authority (/AAA//AAA/) is set to price Wednesday $222.16 million of green sales tax revenue bonds, consisting of $112.245 million of new-issue bonds, Series 2024A, and $109.915 million of refunding bonds, Series 2024B. Jefferies.

The Clifton Higher Education Finance Corp., Texas, (/AAA//) is set to price Wednesday $202.99 million of PSF-insured Idea Public Schools education revenue and refunding bonds, Series 2024, serials 2024-2044, terms 2049, 2054. Baird.

The New Caney Independent School, Texas, (Aaa//AAA/) is set to price Tuesday $200 million of PSF-insured unlimited tax school building bonds, Series 2024. Piper Sandler.

The Clovis Unified School District, California, (/AA//) is set to price Tuesday $195.675 million of GOs. Stifel.

The Missouri Housing Development Commission (/AA+//) is set to price Tuesday $195 million of single-family mortgage revenue bonds, consisting of $180 million of Series 2024C, serials 2025-2036, terms 2039, 2044, 2049, 2054, 2055; and $15 million of Series 2024D, serials 2025-2034, terms 2039, 2044, 2049, 2054. Stifel.

Hamilton County, Ohio, (Aa2/AA+//) is set to price Tuesday $166.305 million of the Metropolitan Sewer District of Greater Cincinnati sewer system revenue bonds, consisting of $100 million of new-issue bonds, 2024 Series A, serials 2025-2053; and $66.305 million of forward-delivery refunding bonds, 2024 Series B, serials 2024-2032. RBC Capital Markets.

The Weslaco Independent School District, Texas, (/AAA/AAA/) is set to price Tuesday $160 million of tax school building bonds, Series 2024, serials 2025-2054. Frost Bank.

The Black Desert Public Infrastructure District, Utah, is set to price Wednesday $151.535 million of non-rated Black Desert Assessment Area #1 special assessment bonds, Series 2024. D.A. Davidson.

The Racine Unified School District, Wisconsin, is set to price Thursday $150 million of GO promissory notes, Series 2024. Baird.

The Garden Grove Public Financing Authority, California, (/AA//) is set to price Wednesday $140 million of lease revenue bonds, Series 2024A, serials 2025-2044, terms 2049, 2054. Stifel.

The Hampton Roads Sanitation District, Virginia, (/AA+//) is set to price Tuesday $117.73 million of wastewater revenue refunding bonds, Series 2024A, serials 2024-2039. Wells Fargo.

The Utah Housing Corp. (Aa2///) is set to price Thursday $114.805 million of taxable single family mortgage bonds, 2024 Series F. Jefferies.

Polk County, Iowa, (Aaa/AAA//) is set to price Wednesday $113.005 million of GO capital loan notes, Series 2024A. J.P. Morgan.

The Kentucky Asset/Liability Commission (/AA//) is set to price Wednesday $107.440 million of Federal Highway Trust Fund first refunding project notes, 2024 Series A. J.P. Morgan.

Augusta, Georgia, (Aa2/AA//) is set to sell $250 million of taxable GOs at 10:30 a.m. Tuesday.

Hempstead, New York, is set to sell $194.547 million of public improvement serial bond at 11 a.m. Wednesday.

Jessica Lerner and Gary Siegel contributed to this story.