[THE ENDGAME] : The Great Debate

Henry Clay vs Stephen A. Douglas, Harlow Shipley vs Heber Curtis, Samuel Wilberforce vs Thomas Huxley, Donald Trump vs Kamala Harris. Nope, it's none of these. It's the 25bp vs 50bp great debate. It appears to be a foregone conclusion that a rate cut is coming. But does the latest CPI data warrant a 50bp rate cut by the Fed next month? Well, that depends on who you ask. While July CPI (0.2% m-o-m, 2.9% y-o-y) may have come in more or less in line with what the Street was expecting, month-over-month, consumer prices rose 0.3% from the previous month, reaffirming the case for an interest rate cut by the Fed next month. While the year-over-year rate is still higher than the Fed’s 2% target rate, the question remains whether that cut will be 25bp or 50bp? Today’s results did little to settle the argument, though traders in the Fed Funds futures market did dial back the chances of a 50bp cut from 53% yesterday to 37.5% this afternoon.

Some argue that with consumer confidence showing signs of weakness and further signs that consumer spending is slowing, awakening concerns of that affect on corporate earnings, a cautious approach (25bp) just won’t cut it. While a 25bp cut might signal a shift, they argue that it’s not aggressive enough to stave off a hard landing, whereas a 50bp cut would send a powerful message to the markets that the Fed is serious about keeping the economy from sliding into a recession. They are also under the impression that follow-up rate cuts of either another 50bp cut in November, or a pair of 25bp cuts in November and December could set the economy up for sustainable growth.

Be that as it may, the latest read on inflation seemed to have little effect on the broader markets, Granted, Treasury yields moved slightly lower, but the stock market was virtually flat for most of the day until those who bought the “dip” were vindicated and drove the market higher into the close. Whether it was because the data came in much as expected, with no surprises, or the fact that the markets have already priced in a rate cut, be it 25bp or 50bp, is open for discussion. However, if it’s not 50bp, they may be sorely disappointed since many believe that if the central bank doesn’t move decisively, we could be looking at a full-blown recession.

On the other hand, UBS CEO Sergio Ermotti, who is in the camp that believes the Fed will cut rates by only 50bp this year, said that, while market volatility could intensify in the second half of the year, he does not believe the US is heading into a recession. “The macroeconomic indicators are not clear enough to talk about recessions, and actually, it’s probably premature,” said Ermotti. “What we do know is that the Fed has enough capacity to step in and support that, although it’s going to take time, whatever they do to then be transmitted into the economy.”

Speaking of a recession, while the talking heads have been applauding the fact that the 2yr/10yr yield curve inversion has narrowed to a mere 12bp, the 3m T-Bill/10yr yield curve, the Fed’s preferred recession barometer recession, is still inverted by 153bp. An inverted 3m T-Bill/10yr yield curve doesn’t necessarily always precede a recession, but more times than not it has been the harbinger of one on the horizon.

In any event, much like yesterday, CPI kept most high-grade borrowers on the sidelines, though, again like yesterday, two issuers decided there wasn’t enough meat on the inflationary data to prevent them from moving forward with their planned financings. State Street Corp tapped the market for $1bln through a 4.5nc3.5 fixed-to-floating rate note offering, while South Bow Canadian Infrastructure Holdings raised $3.65bln through a 4-pt (3s, 5s, 10s & 30s), which, all but the 10yr, tightened 5bp further from launch, to finance its spinoff transaction. The deal also built a final book of $23.5bln (6.44x covered). That brought ex-SSA issuance for the week to $23.6bln, enough to top the lowest weekly estimate of $22.5bln, though still shy of the average weekly estimate of $30bln, though it’s only Wednesday.

South Bow Canadian Infrastructure Holdings also raised $1.1bln via a non-investment grade rated 2-pt offering of 30.5nc5.25 & 30.5nc10.25 junior subordinated fixed-to-fixed rate notes for the same purpose, that was also well received (7.18x covered.

As mentioned, this morning, you can add another blockbuster deal to the ever-growing M&A pipeline. It was announced this morning that family-owned candy giant Mars would buy Kellanova, which was split from WK Kellogg last October, in an all-cash deal valued at nearly $36bln, making it the biggest buyout ever in the packaged food industry, topping Mars' $23bln takeover of Wrigley 16 years ago. We also added another potential deal to the immediate high-grade pipeline after Affiliated Managers Group held investor calls today which could lead to a senior unsecured note offering.

As previously mentioned, the three major indices rallied into the close with the Dow closing 224 points higher, while the S&P500 (+0.29%) following suit, though the Nasdaq (-0.07%) couldn't quite keep pace. Overall, Treasuries closed a tad better with yields falling 2 to 3bp across the curve. And now we look ahead to advance retail sales (0.4%) and initial jobless claims (235k) tomorrow.

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