Monday Morning Kickoff

Well last week was definitely a wild one for both stock and bond markets–and we expect that we will begin to see some settling in the markets. Interest rates traded in a range of 3.05 to 3.25% and closed the week at 3.22%.  Our best guess is that rates will stabilize right in here and could drift a bit lower in the week ahead–that would be a typical  pattern.  This week will see the bond markets closed on Monday for the Columbus day holiday.  We would guess that the stock market will also settle down after the DJIA traded in a range of 26,300 to 26,950 last week before closing at 26,447.  Equity markets will be open all week–no holiday on Monday.

So looking back at last week the biggest economic news was the modest number of new jobs created in August.  134,000 new jobs were created which was way under the consensus expectations. The wage component of the report indicated wages rising at 2.8% annually which is slightly lower than the month before–no giant wage inflation coming through–so far.  Of course the few jobs being created was blamed on the weather in the southeast.  The PMI manufacturing index came in as expected,  while the ISM manufacturing index came in weaker than last month and weaker than consensus.  Construction spending was weaker than expected and than consensus, while motor vehicle sales were stronger than anticipated at 17.4 million vehicles annually.  The Purchasing Managers Index for services came in strong while the ISM non manufacturing index also came in stronger than expected.  It is always amazing that hardly any economic data has been deemed important–for months and month and then like magic–voila–someone thinks data is any stronger than last month.  Oh well we simply have to react–or not–to movements in interest rates.

For the coming week we have absolutely no economic releases on Monday and Tuesday.  Wednesday we have the PPI (producer price index) and the forecast is for a .2% increase with the CPI (consumer price index) being released on Thursday.  The CPI is expected to increase by .2% for September.  If expectations are met it may relieve some of the interest rates pressures.  Friday we have the Consumer Sentiment Index being released–we shall see how strong the numbers are as all consumer sentiment numbers (i.e. consumer confidence) have been running really hot and to us great numbers ‘green light’ the economy for months to come.  Short of a black swan event consumers don’t go from super bullish to bearish over the course of a month–these things take some time to play out.

The Fed Balance sheet fell by $18 billion last week after falling $16 billion the week before.  While these larger run offs may contribute some to increasing interest rates we think it only 1 of many potential factors.  One thing we know for sure—demand for treasuries is reduced as the balance sheet runoff continues.

We had a few new issues come to market last week.  Business development company THL Credit (NASDAQ:TRCD) announced a new baby bond that priced at 6.125%–the issue matures in 2023.  Midstream MLP DCP Midstream (NYSE:DCP) announced a fixed to floating rate preferred with an initial fixed rate of 7.95%.  This issue is trading under the OTC Grey Market ticker of DCPUU and last priced at $24.50/share.  Lastly Brunswick Corporation (NYSE:BC) issued a 6.5% baby bond with a longer maturity date out in 2048.  Because of the shorter dated maturity we may have future interest in the THL Credit issue–but not at $25–maybe at $24 or less.

The average price of a $25 preferred fell by a hefty 47 cents to trade at $24.25.  We haven’t seen this type of drop for quite some time, but we would bet a dollar that prices will stabilize and rise a bit in the week ahead.  We now have 235 issues trading under $25–the largest number we can remember seeing this year.


4 thoughts on “Monday Morning Kickoff”

  1. Stopping rate hikes right here is warranted and makes sense. The 10 year, a full 1% over the 2.25% fed funds rate. About 1.1% above the CPI and about 0.4 – 0.5% above wage inflation.

    I am very skeptical it stops here however. I believe this “bakes” in the December rate increase only. I still think as a minimum the market builds in the March rate hike since 2019 has 3 rate hikes foretasted by the Fed. If we break above 3.25%, that’s what I believe is happening. I see that as a critical psychological level.

    Should be interesting to see what happens. I sure hope you are right and the market prices in rate increases as they happen (2-3 months ahead of time) based upon the fed’s forecasts and does not try to get ahead of the Fed

    1. If the market does go higher short term to get ahead of the fed it may be even better for the longer term preferred stock holder. Could result in even bigger bargains. In a holding pattern for now

  2. The rise in the 10 year Treasury was actually helpful for some of us long-term preferred holders, as some issues have dropped in price and there are now some really good opportunities in the fixed income market now. At least for now, there are some very good opportunities in the 7% range for REIT preferred investors.

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