[MORNING CALL:] Make It Matter

As expected, high grade primary issuance slowed to a crawl yesterday with only one deal – a $100m 3yr tap from Main Street Capital – crossing the finish line as the markets fixated on the August CPI report (0.2% vs 0.2% m-o-m and 2.5% vs 2.5% y-o-y). Recent signs that the Fed would cut interest rates by 50bp when it meets next week had spawned a relief rally in the broader markets. However, the latest data, the last major economic data release before next week’s FOMC meeting, sort of dashed those hopes, though a 25bp cut is still in the cards.

Traders in the Fed Funds futures market revised their predictions following the CPI release. Whereas the odds of a 50bp cut stood at 34% on Tuesday, those odds fell to a mere 15% yesterday, while the odds of a 25bp cut rose to 85% from 56% last week. Even though the rate of inflation declined 0.4% from July, the lowest since February 2021, the core CPI increased 0.3%, higher than the Street estimate.

In typical knee jerk fashion, the Dow fell more than 740 points before rebounding to close 125 points higher as pressure eased on bank stocks, while the S&P500 (+1.07%) and the Nasdaq (+2.17%) also closed higher after swooning early on, led by Nvidia which was up 8%, as investors digested the latest CPI report in an attempt to understand the health of the broader economy. Cooler heads apparently prevailed as the talking heads convinced investors that it would make little difference if the Fed cuts interest rates by only 25bp next week.

“A 25bp cut leaves the door open for more interest rate cuts in November and December of 25 more basis points, if not 50bp, as the Fed may come to the realization that they are behind the curve, which they are," said one such market pundit. He added, "However, the huge selloff in the morning tells me that there are some who believe there is a possibility, though slim, that the Fed doesn't cut rates at all next week, since the data, as benign as it was, may not be to the Fed's liking. So, the idea that a 25bp guaranteed cut next week may be already priced into the market may be a misnomer."

The data came as investors grappled with market volatility, which is typical of September, which has been the worst month for the S&P500 over the last decade. As for the Treasury market, yields continued to fall across the curve early on only to reverse course as the session wore on and the risk-on trade came back into vogue. The benchmark 10yr note yield fell for the seventh straight session to 3.63%, its lowest level in 15 months before closing unchanged at 3.65%, while the long bond yield fell 3bp to 3.94%, a level it hasn’t seen since before Christmas, before it too trended higher in the afternoon, closing at 3.96%, down 1bp on the day. As for the 2yr note, the most susceptible to the vagaries of underlying interest rates, closed at 3.62%, 3bp higher on the day, giving back much of yesterday's gains, but still close to the lowest the yield has been in two years.

Yesterday’s lone high-grade offering brought ex-SSA issuance for the week to $23.225bln, a bit below the lowest weekly estimate of $25bln, and allowed the primary market to avoid its seventeenth “zero” day of the year. While the CPI report kept would-be issuers on the sidelines yesterday, we don’t expect today’s August PPI report (0.1% m-o-m, 1.7% y-o-y) or the weekly initial jobless claims (227k) to produce the same results. We’re expecting at least a half a dozen borrowers to forge ahead with their financing plans today, including Hewlett-Packard who wrapped up investor calls yesterday.

However, there were no deals announced overnight as the European market awaits the ECB’s interest rate decision. The European Central Bank is widely expected to cut interest rates by 25bp this morning, its second reduction of the year following a similar cut in June. Sluggish economic growth across the euro zone and cooling inflation are the driving forces behind the expected rate cut.

Unless we see another deal like Oneok's $7bln 6-pt offering from earlier this week among those expected to tap the market today, it's going to be a tough road to hoe to get to the average ex-SSA weekly estimate of $35bln, let alone the $52bln we thought could price this week. But, with HP Enterprise expected to raise $6.5bln to help fund its $14bln Juniper Networks acquisition, the average weekly estimate could very well fall by the wayside. That’s if the deal comes today. If it does, it would mark the fourth M&A-related transaction of the week. Earlier this week, aside from the aforementioned Oneok deal, Helmerich & Payne raised $1.25bln via a 3-pt offering to help fund the purchase price ($1.9725bln) for the KCA Deutag acquisition, while Bunge Ltd Finance raised $2bln to fund a portion of the cash consideration for the acquisition and to repay a portion of certain Viterra debt to be assumed in connection with the acquisition.

As for market conditions this morning, futures are indicating a slightly higher open for the three major indices after yesterday’s volatile session, and in the run up to this mornings ECB decision, the release of August PPI and the latest initial jobless claims report. Over in the Treasury market, yields are a tad higher as hopes of a 50bp rate cut next week faded with the latest economic data. The benchmark 10yr note saw its yield edge 2p higher overnight to 3.67%, while the long bond yield also moved 2bp higher to 3.98%. On the shorter end, the 2yr note yield jumped another 4bp to 3.66%. Corporate spreads were unchanged, with the average high-grade bond trading 101bp over comparable Treasuries.

.

2024 HIGH GRADE ISSUANCE - 09/09 WEEK, SEPTEMBER & 2024 ESTIMATES

.

.

2024 HIGH GRADE ISSUANCE - RECENT MANDATES

.

2024 HIGH GRADE ISSUANCE - 09/11 PRICINGS

.

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

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