[MORNING CALL:] We Have All Been Here Before

MORNING CALL: We Have All Been Here Before 06/10/24

With a few Asian markets closed for a holiday, including Australia, mainland China, Hong Kong and Taiwan, and European politics firmly in the spotlight to start the week where uncertainty created by a strong showing from the far right in the European elections has the potential for increased political fragmentation and policy deadlock, it s no wonder there were no high grade issues announced overnight.

Encouraging labor market data early last week had the broader markets feeling that the Fed could be getting close to thinking about thinking about cutting rates. The higher for longer mantra appeared to have morphed into lower, sooner. Private payroll data from ADP showed hiring slowed to 152k jobs last month, far below what the 175k Street had been expecting, yet another sign of weakness in the labor market that investors hope will give the Fed enough evidence to cut interest rates sooner rather than later.

An increase in the number of people (229k vs 221k) applying for first time unemployment benefits was another sign of a weakening jobs market, as was the JOLTS job openings report which showed 8,059k vacancies in April, the lowest level in over three years, and far below the estimate of 8,350k openings.

With renewed hopes of a rate cut, traders in the Fed Funds futures market were putting the odds of a rate cut come September at 54.2% up from 47% a week earlier, and Treasuries extended their week-long rally, with the benchmark 10yr note lower by 23bp on the week, until Friday that is, where the odds dropped to 45% after the payrolls number.

The May jobs report was supposed to show that the economy added 180k new jobs, which would more than confirm a slowdown in the labor market. However, the data showed an increase in the number of jobs of 272k, taking the wind out of the sails of the Treasury market, and the starch out of the Fed Fund futures market.

The benchmark 10yr note yield jumped 15bp to close at 4.43%, and rose further over the weekend, to where it is now trading at 4.46%. Meanwhile, the long bond rose 12bp on Friday, and 4bp over the weekend to 4.59%. On the short end of the curve, the 2yr note saw its yield rise 15bp on Friday and 3bp this morning to 4.90%. Corporate spreads, on the other hand, tightened 2bp to where the average high grade bond is now trading 90bp over comparable Treasuries.

That has traders circling back to the higher for longer mantra, which could have implications for high grade issuance this week. Either would-be borrowers could decide to accelerate planned financings in the face of higher interest rates, or they could decide to hold off until the dust settles. According to the results of our weekly issuance poll, the latter seems to be the most likely scenario.

On average, the Street is looking for at least $20bln in additional ex-SSA supply now that the bulk of economic data is out of the way, though there is still CPI (0.1% m-o-m, 3.4% y-o-y), PPI (0.1% m-o-m, 2.5% y-o-y) and the FOMC meeting to contend with. The guesses for this week ranged from a low of $12.5bln, to a high of $30bln.

This after high grade issuers managed to raise $33.575bln last week, enough not only to top the average weekly estimate of $25bln, for the seventeenth week this year, but the highest estimate of $30bln as well. Corporate issuers paid little attention to the general market backdrop and continued to pump deals into the market, despite the number of high grade deals dwindling as the week progressed.

As for market conditions this morning, as previously mentioned, Treasury yields continue to rise, while futures are indicating a modestly lower open for the three major averages, as the markets focus on the latest inflation data, which could prove key tests for markets, especially after Friday s strong jobs report continued to suggest the central bank could hold off on lowering rates any time soon.

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