Fixed Income & Equities Markets Week in Review

Treasury yields moved higher this week, with rates climbing to their highest levels since early September. Shorter maturities led the move, reflecting how closely they track expectations for Federal Reserve policy. The upward pressure came largely from stronger-than-expected data: Thursday’s jobless claims report showed fewer filings than anticipated, easing fears of a rapidly weakening labor market, while second-quarter GDP was reported at 3.8%, comfortably ahead of forecasts.

Still, the labor picture remains far from settled. Just two weeks ago, revisions showed the U.S. economy had created 911,000 fewer jobs than previously reported. More recent monthly gains were equally underwhelming, with increases of only 22,000 in June, 79,000 in July, and an outright decline of 13,000 in August - the slowest three-month average in over four years. It was this deceleration that prompted the Fed to cut rates last week for the first time in nine months. While this week’s data offered some reassurance, a clearer signal will likely come with next Friday’s September employment report.

Markets adjusted quickly to the shifting tone. At the start of the week, futures implied a 94% probability of another quarter-point cut at the Fed’s October 29 meeting. By Friday, that probability had fallen to about 83%. Policy commentary did little to narrow the range of views. Stephen Miran, the Fed’s newest governor, reiterated his belief that the neutral rate is falling and advocated for aggressive easing of 150–200 basis points. Vice Chair Michelle Bowman suggested inflation was close enough to target to justify further cuts, while Kansas City Fed President Jeff Schmid signaled that additional easing may not be needed. Dallas Fed President Lorie Logan added to the uncertainty with remarks suggesting the Fed should consider moving away from the federal funds rate as its primary policy benchmark. Rarely has the divergence of opinion among policymakers been this wide, leaving the policy outlook highly uncertain.

Supply dynamics also contributed to this week’s move in yields. September proved to be the busiest issuance month of the year, with nearly $197 billion in new investment-grade corporate supply. Oracle’s $18 billion deal was the highlight, drawing demand of nearly $88 billion at its peak. The Treasury also brought $183 billion in new coupon-bearing notes to market. The combined wave of corporate and government issuance added another layer of upward pressure to rates.

Note: Municipal yields are as of the previous business day.

* Composite A
** General Obligation AA+
*** Int'l value of the U.S. dollar (Avg. exchange rate between the dollar and 6 major world currencies).
**** Futures price per gallon