Last week was mostly quiet overall from an economic data standpoint. Retail Sales data came out flat, but it was better than expected and softer than the month prior. The curve steepened further by about 5 BPS. This week will be much busier with data; however, Biden dropping out of the election will likely still dominate headlines. We’re now in a Fed quiet period, but there are three big Treasury auctions this week: 2’s tomorrow, 5’s Wednesday, & and 7’s Thursday.
Wednesday, we get Manufacturing and Services PMI data, which are both expected to come out on par with last month. We also get GDP Thursday, which is around 1.9% for Q2 as of now. PCE on Friday is the big release of the week, given that it’s the preferred measure of inflation for the Fed. The headline number is expected to be a 0% gain (on par with last month), but Core PCE is expected to come down to 2.5% YoY. Anything softer could possibly solidify a cut in September and therefore could immediately cause downward pressure on rates. A narrative shift in the other direction could also cause a lot of volatility, since there seems to be a unified sentiment that lower rates are better for everyone. Powell also noted that the Fed has historically acted too late, which gave the market more fuel to folly price in a September cut.
Average CMBS coupons are around 6.9%, with most recent deals being full IO with a 5-year term. Buydowns can be larger, which helps some deals pencil that didn’t work with the Agencies. Leverage is lower (around 50-55% on average) and fixed rate options remain more attractive with SOFR remaining flat.
