[MORNING CALL:] A Double-edged Sword

It certainly wasn’t an august start to August for the equity markets after the Dow fell more than 495 points, while the S&P500 and the Nasdaq closed lower by 1.37% and 2.30%, respectively, as the latest economic data reawakened fears of a recession. And things don’t look a heck of a lot better this morning. And we haven’t even gotten to the jobs report (175k) yet.

Futures are indicating another dismal day on the horizon – Dow/-365, S&P500/-62, Nasdaq/-317 – with shares of Amazon falling 8% after missing Street estimates on Q2 revenue and issuing a disappointing forecast, while shares of Intel tumbled nearly 20% after announcing weak guidance and layoffs. Despite delivering better-than-expected quarterly results, shares of Apple traded 2% lower.

While investors initially embraced the fact that the economy was slowing enough for Fed Chairman Powell to all but assure the market that the Fed is gearing up to cut interest rates as soon as September, the reality that a slowing economy could negatively impact corporate earnings going forward leading to a possible recession hit home. Initial jobless claims rose to 249k last week, the most in a year and topping forecasts (235k). The ISM manufacturing index, a barometer of factory activity in the, came in at 46.8%, worse than expected a sign that the economy may be contracting.

Those recession fears – keep your eye on the 3m TBill/10yr curve, whose inversion has widened to 144bp - were further stoked by comments from DoubleLine’s Jeffrey Gundlach, who thought the Fed should have cut rates at yesterday’s meeting, thinks the Fed is risking a recession by waiting too long. As a matter of fact, Gundlach thinks the Fed is going to have to cut rates as much as 150bp over the next year

A further sign of a weakening economy was the slide in Treasury yields, already falling in anticipation of one or more rate cuts this year. The benchmark 10yr note yield fell 6bp to 3.99%, its first close below 4.00% since the first week of February when the Street was still looking for as many as six rate cuts before the end of the year. The long bond yield went along for the ride, falling 8bp to 4.27%, its lowest level in four months, while the 2yr note, the most susceptible to the vagaries of underlying interest rates, saw its yield fall 13bp, closing at 4.16%, a yield not seen since the second week of the year.

And the rally continued overnight, with the benchmark 10yr yield falling 6bp to 3.93%; the long bond yield falling 4bp to 4.23%; and the 2yr yield falling 5bp to 4.11%. Unfortunately, as the yield rally in Treasuries gathers momentum, corporate spreads continue to widen, with the average high grade bond now trading 100bp over comparable Treasuries, a level not seen in nearly five months.

At the same time, traders in the Fed Funds futures market, while keeping the odds of a 25bp cut come September, have upped the chances of a 50bp cut to 29.5%, up from 22% yesterday. But if that doesn’t happen, they’re pretty sure (65.2%) another 25bp cut will come in November.

While it was widely expected that activity in the high grade primary market would be limited as borrowers and lenders digested the Fed Chairman’s latest remarks, seven issuers turned a blind eye to the carnage in the equity market, preferring instead to take advantage of the rally in Treasury yields, to tap the US public debt market, kicking off the month of August by raising $8.825bln, bringing ex-SSA issuance for the week to $31.125bln, enough to top the average weekly estimate ($27bln) for the twenty-fourth time this year. However, despite a $3bln 2-pt offering from Republic of Peru, overall (SSA-inclusive) issuance just missed matching the average weekly estimate of $35bln, coming in at $34.125bln.

Yesterday’s deals, led by a $2.5bln 2-pt offering from Enterprise Products Operating, saw a fair amount of interest from investors who appeared to be occupied elsewhere, contracting only 21.9bp from IPT/PX, while building a combined book of just under $20bln, or 2.2x covered. The average NIC on today’s deals came in at 5.82bp. Year-to-date, we have seen deals compress an average of 26.2bp, while being 3.5x oversubscribed, and pricing with an average NIC of 2.5bp.

While we’re not expecting anything to price today – dare I say that two days in a row – August, which is expected to produce, on average, $80bln in ex-SSA issuance, is off to a pretty good start. With the exception of December, August is historically the slowest high grade issuance month of the year. Over the last decade, high grade issuance in the month of August has averaged a rather anemic $87.85bln, though we have seen as much as $140bln (2020), but also as little as $42bln (2014) price during the “dog days of summer.” Last August, 44 borrowers raised $68.1bln, far below the 10yr average. The guesses for this August ranged from a low of $75bln, to a high of $95bln.

.

2024 HIGH GRADE ISSUANCE - 2024 VS 2023 COMPARISON

.

.

2024 HIGH GRADE ISSUANCE - 07/29 WEEK, JULY & 2024 ESTIMATES

.

.

2024 HIGH GRADE ISSUANCE - RECENT MANDATES

.

.

2024 HIGH GRADE ISSUANCE - 08/01 PRICINGS

.

---- Subscribe to read more ----

To receive this analysis plus much more, subscribe to IGM. Request your free trial of the service today.