Municipals were little changed Friday ahead of a week of virtually no supply as all eyes turn to the election and macroeconomic policy. U.S. Treasury yields rose and equities ended up after a weaker-than-expected jobs report.
The employment report underwhelmed, with just 12,000 jobs added in October, but observers dismissed the report because of the devastating hurricanes that wreaked havoc early in the month, and said the Federal Open Market Committee will proceed with a quarter-point rate cut at its November meeting.
Because of the hurricanes, the report offers a cloudy “picture of labor market strength, and so should not impact the Fed’s policy rate path,” said Seema Shah, chief global strategist at Principal Asset Management.
A deeper look at the numbers offers the view of “a fundamentally slowing labor market,” Shah said. “The consensus forecast for a 100,000 increase in payrolls was already taking the hurricane effect into account, so the significant downside surprise indicates underlying weakness.”
As such, the Fed needs to continue the cutting cycle despite recent “surprisingly strong economic activity data.” Shah sees quarter-point cuts at the next two meetings.
Muni investors are now preparing for election-related and Fed meeting-induced volatility next week, while also contending with the after effects of one of the heaviest supply periods in recent history, said Mikhail Foux, managing director and head Municipal Research and Strategy at Barclays.
This has led to a “meaningful” decline in secondary trading activity, “while some investors have started trimming their municipal exposure, right-sizing their positions prior to next week, and the pace of bid-wanteds has noticeably picked up,” he said.
However, the muni market withstood selling pressure “relatively well,” with only a slight cheapening of municipal-UST ratios, Foux said.
The two-year municipal to UST ratio Friday was at 64%, the three-year at 63%, the five-year at 64%, the 10-year at 69% and the 30-year at 85%, according to Refinitiv Municipal Market Data’s 3 p.m. EST read. ICE Data Services had the two-year at 65%, the three-year at 64%, the five-year at 65%, the 10-year at 70% and the 30-year at 85% at 3:30 p.m.
Technicals are likely to improve during the final two months of 2024, as issuance should fall, he said, noting there will be a lackluster new-issue calendar next week at an estimated $492.1 million, while the Bond Buyer 30-day visible supply is at $4.01 billion, the lowest level in months.
The VSFBA Environmental Facilities (Aaa///) leads the negotiated calendar $125 million of Pure Salmon Virginia Project revenue bonds.
The competitive calendar is led by Fort Lauderdale in two series: $45.575 million of water and sewer revenue bonds, Series 2024 and $81.31 million of water and sewer revenue refunding bonds.
Issuance will “not completely disappear, but will adjust to its seasonal norm from the record-breaking pace of the past several months,” he said.
Supply
Foux noted “investors should be positioned on the lighter side going into next week, but should still have meaningful exposure.”
If there is a “red wave,” he expects a “moderate selloff,” with tax-exempts likely underperforming by two to four percentage points.
However, Foux does not believe there will be a “more abrupt reaction” if a “red wave” happens, as the market has already priced in this possibility.
“We would also consider adding on weakness, as the market should recover by the end of the year if not earlier, in our view,” he said.
In all other scenarios, USTs should do “relatively well,” while munis are expected to outperform after the election result becomes clear, according to Foux.
AAA scales
Refinitiv MMD’s scale was little changed: The one-year was at 2.85% (unch, no Nov. roll) and 2.69% (unch, no Nov. roll) in two years. The five-year was at 2.70% (unch, +2bp Nov. roll), the 10-year at 3.02% (unch, +1bp Nov. roll) and the 30-year at 3.87% (unch) at 3 p.m.
The ICE AAA yield curve was little changed: 2.96% (unch) in 2025 and 2.71% (unch) in 2026. The five-year was at 2.70% (unch), the 10-year was at 3.00% (unch) and the 30-year was at 3.79% (unch) at 4 p.m.
The S&P Global Market Intelligence municipal curve was unchanged: The one-year was at 2.90% in 2025 and 2.73% in 2026. The five-year was at 2.71%, the 10-year was at 3.01% and the 30-year yield was at 3.80% at 4 p.m.
Bloomberg BVAL was little changed: 2.86% (unch) in 2025 and 2.67% (unch) in 2026. The five-year at 2.71% (unch), the 10-year at 3.02% (unch) and the 30-year at 3.80% (-1) at 4 p.m.
Treasuries were weaker.
The two-year UST was yielding 4.205% (+3), the three-year was at 4.180% (+5), the five-year at 4.215% (+6), the 10-year at 4.368% (+8), the 20-year at 4.683% (+9) and the 30-year at 4.564% (+9) at the close.
Employment report
“This is an underwhelming and muddying jobs report 5 days before an election,” said Lara Castleton, U.S. head of portfolio construction and strategy at Janus Henderson Investors. “Effects of hurricanes saw headline jobs survey disappoint with only 12,000 jobs created vs. the expected 100,000 but unemployment remained steady at 4.1% and average hourly earnings rose more than expected to 0.4%. Markets were looking for a clear signal and this report did not deliver.”
Scott Anderson, chief U.S. economist and managing director at BMO Economics, said “bad weather and large labor strikes … make labor market weakness appear worse than it truly is.”
Anderson said the Fed’s job is “to see through the noise and they will probably take some signal from the continuing labor market softening as a sign that they can continue the process of monetary normalization without much fear of igniting another bout of inflation.”
With the Fed concentrating on employment, this report “cements expectations for a 25bp Fed rate cut,” with a similar move following in December, said ING Chief International Economist James Knightley.
But the payroll number was “not really a surprise,” said Chris Low, chief economist at FHN Financial. “The -112k two-month revision was a surprise, and is more concerning, especially after last month’s report — including revisions — was surprisingly strong.”
The hurricanes “likely had an impact, as the Southeast is the fastest growing part of the country,” he added.
For the Fed and the markets, Low said, “these numbers are anomalies. Wait for November and net the two months together, or better yet, wait for December and net all three months of the quarter to get a real sense of what is happening in the job market.”
In addition to the hurricanes, strikes played a role in the below-expectations number, said Wells Fargo Investment Institute Senior Global Market Strategist Scott Wren.
“The report will be difficult to parse accurately given the weather- and strike-related distortions but it doesn’t change our view that the labor market should further decelerate in coming months and continue to look for the unemployment rate to rise slightly from here by the end of this year (our projection for YE remains 4.4%) and increase to 4.8% by YE2025,” Wren said. “This should keep the Fed on track to cut 25 bps at both the November and December meetings.”
Still, he noted, the 4% increase in average hourly earnings for the year will be a concern for the Fed, with wage pressures playing a role in the monetary policy decision.
Although investors should ignore the headline number, Payden & Rygel Chief Economist Jeffrey Cleveland said, “the three-month average pace of job growth after revisions had slowed to 148k prior to October (so the data through September), which shows a clear slowdown in the pace of hiring.”
And even though 148,000 jobs a month keeps “downward pressure on the unemployment rate, it marks a softening labor market relative to springtime (same figure was closer to 250k per month in the spring),” he said.
Despite the issues with the report, “the unemployment rate not increasing again is a good sign for the economy and breaks the Sahm rule everyone was panicking about a couple months ago,” noted Byron Anderson, head of fixed income at Laffer Tengler Investments.
Healthy gains in hourly earnings promote “confidence in the economy,” he said, and payrolls should pick up as the impacts of the hurricanes and the Boeing strike subside.
“Poor jobs and downward revision are even worse than the hurricane adjusted estimates,” said Bryce Doty, senior vice president and senior portfolio manager at Sit Investment Advisors. He expects a 25-basis-point cut in November. “The yield curve should steepen on this news let by shorter maturity Treasury yields coming back down.”
The election could influence the Fed’s 2025 path, according to Giuseppe Sette, president of AI market research firm Reflexivity. “Inflation is under control and with rising unemployment we can expect further cuts as a default choice. But a Republican win bringing back higher spending and tariffs might re-awaken inflationary pressures.”
“While the Fed will likely attribute some of the weakness in [the] data to one-off factors, the softness … argues for the Fed to continue its easing cycle,” said Lindsay Rosner, head of multi sector fixed income investing at Goldman Sachs Asset Management.
“Treasury yields have climbed since the Fed’s last policy meeting which are ultimately restrictive to economic activity and counter to the Fed’s interest in easing restrictions,” said Mark Malek, CIO at Siebert. “After this morning’s release, yields on both the 2-year and 10-year Treasury notes declined indicating bond traders’ increased confidence in the Fed’s continued rate cut path.”
Gary Siegel contributed to this story.