JPMorgan Econ FI-US Fixed Income Overview Risks skewed to lower yields as May...-108474416.pdf

1PhoebeWhiteAC(1-212)834-3092phoebe.a.white@jpmorgan.comJ.P.MorganSecuritiesLLCLiamLWash(1-212)834-5230liam.wash@jpmchase.comJ.P.MorganSecuritiesLLCHollyCunningham(1-212)834-5683holly.cunningham@jpmorgan.comJ.P.MorganSecuritiesLLCNorthAmericaFixedIncomeStrategy31May2024JPMORGAN•Economics:CorePCErose0.2%inApril,leavingtheyear-agorateunchangedat2.8%.Nominalconsumerspendingcameinweak,andthuswereviselowerour2QrealGDPgrowthforecastto2.0%q/qsaar.Weexpectnon-farmemploymentrose150kinMay,theweakestreadingsinceMarch2023,astheunemploymentrateheldsteadyat3.9%•Treasuries:Valuationsremainattractiveandfurthermoderationinthelabormarketsupportsloweryields:addequi-notional2s/5sflattenersforlow-betabullishexposurewithbettercarrythanoutrightlongs.Stayneutralbreakevens.WetookprofitsonJul24/Jul25forwardbreakevenwideners•InterestRateDerivatives:Wesee1s/Greensflattenersasanattractivewaytoaddbull-ishexposure,giventhecorrelationwith5Yswapyieldsandthepositivecarry.Givenaflatteningbiasonthefrontendofthecurve,andimpliedsthatappearverycheaptofairvalue,wenowrecommendbuying1Yx10Yswaptionvolatilityonadeltahedgedbasispairedwith1s/Greenscurveflattenersforrelativevalue.Maintainspreadwidenersinthe2Ysector•ShortDuration:SOFRsettledslightlyhigherweek-over-week,inlinewithtypicaltrendsintherepomarketssurroundingmonth-ends/quarter-ends.Weexpectreporatestodescendbackdowntowardspre-month-endlevelsoncedealerbalancesheetsnormal-izeandTreasurysettlementworksitswaythroughthesystem•SecuritizedProducts:Mortgageperformancewasmixedacrosstheholiday-shortenedweek.Werecommendmodestunderweightin5s,favoringhighercoupons.InmortgagecreditwethinkJumboPTsstillappearrichcomparedtoagencyMBSandfavornon-QMforattractiveoption-adjustedspreads.ABSprimarydealscontinuetobeoversubscribeddespiteheavyissuance•Corporates:HGcreditmetricsfor1Q24deteriorated,thoughEBITDAex-commodi-tiesisimprovingsometricsarelikelytoturnaroundinfuturequarters.Risingsharehold-erpayoutsreflectreducedrecessionfearsandinterestexpenseisrisinglessquickly•Near-termcatalysts:AprilJOLTS(6/4),Mayemployment(6/7),JuneFOMCmeeting(6/11-6/12),MayCPI(6/12),Mayretailsales(6/18)Sinceourlastpublicationtwoweeksago,yieldsroseandmortgagespreadswidened,whilecreditspreadscontinuedtotradeinatightrange.Ononehand,theUSMayflashPMIssurprisedtotheupside,withtheservicesbusinessactivityindexrebounding3.5-ptsto54.8,a25-monthhigh(seeUS:MayflashPMIsrebound,M.Hanson,5/23/24).Furthermore,theconsumerconfidenceindexroseto102whilethelabordifferentialimprovedto24inApril(seeUS:ConsumerconfidenceimprovesinMay,M.Hanson,5/28/24).Thatbeingsaid,AprilPCEcameinsofterthanexpectations,asthecoreindexrose0.249%m/m,leavingtheyear-agorateunchangedat2.8%.Atthesametime,nominalconsumerspendingrose0.2%inApril,leadingoureconomiststorevisetheircurrentquarterGDPforecastdownto2.0%q/qsaar,from2.25%(seeUS:SomecoolinginAprilPCEpricesand2QGDPgrowth,M.Hanson,5/31/24).Meanwhile,thelanguageoftheMayFOMCminutesweremorehawkish,indicatingmembersbelieveitwilltakelongerthanpreviouslyanticipatedtogainconfi-dencetha