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Credit Insights

While the Grown-Ups Are Away, the Kids Will Play

Despite investors' efforts to push the markets higher, equity mutual funds, once again, experienced redemptions, while money continued to pour into fixed income.

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The grown-ups are either on vacation or in the Hamptons, and the kids are staffing the trading desks. The kids were eager to move the markets up, and the week started off on a positive tone as new merger and acquisition activity heated up and earnings continued to beat expectations.

The equity market disregarded any weak economic news, made some gains, and pushed credit spreads tighter for the first half of the week. However, that tone changed Thursday, as either the kids were chastised by data too rough to ignore or a few of the grown-ups called to check in. New jobless claims rose for the fourth week in a row, to 500,000, easily surpassing estimates of 478,000. This is the highest weekly reading since mid-November 2009 when jobless claims were on a solid downward trajectory after peaking in the spring of 2009.

Shortly after shocking the markets with the claims number, the Philadelphia Fed released its Business Outlook Survey, which further stunned the market with a negative 7.7 reading. The market was caught leaning the wrong way, as consensus estimates were for a positive 7.0 reading and whisper estimates were even higher right before the release. In the Philly Fed Outlook, some of the most significant declines in the underlying data were in new orders, shipments, and inventories.

Earlier in the week, most indicators such as new housing starts and building permits were below expectations. Industrial production appeared to be the bright spot as it increased 1.0%, doubling expectations, but a significant amount of the increase was caused by seasonal factors, as the auto industry did not close assembly plants this year as they typically do to change over production lines. Without the effects of the seasonal adjustment, industrial production gains were limited.

Treasuries rallied again, and the 10-year and 30-year Treasury bonds ended the week at 2.57% and 3.64%, respectively. It may be a rhetorical question, but just how much lower can Treasury yields go? We have cautioned that the fixed-income and equity markets have been making very different assumptions on where the economy is headed, and this week it appears that the fixed-income markets have the edge.

Once again, equity mutual funds experienced redemptions, while money continued to pour into fixed-income mutual funds. Unfortunately for fixed-income portfolio managers, the tide of new issues receded last week, and we finally experienced the typical August slowdown. Amid the slowing in new offerings, banks and financial services dominated the flow. We expect the new-issue market to remain quiet for the remainder of the month but to return in full force after Labor Day weekend.

David Sekera does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.