As widely expected, the Fed cut rates by 25 basis points on October 29 amid ongoing employment concerns. It indicated that economic activity had been expanding at a moderate pace, job gains had slowed, and the unemployment rate had edged higher, but remained low through August.

The quarter began with a continued steepening of the municipal curve, as short-term yields decreased while intermediate and long-term yields moved higher over july. additionally, after lagging treasuries in the first half of the year, municipals outperformed at the start of the quarter.

April opened with a surge in volatility following tariff announcements, triggering the largest three-day yield spike on the AAA muni curve (up 90 bps) since the COVID-19 shock. After $8.7 billion in outflows during April, municipal mutual funds saw a rebound, with nine consecutive weeks of inflows to close the quarter, including $4.8 billion in May and $2.3 billion in June.

January began with a stronger-than-expected employment report, which showed job gains of 265,000, the largest increase since March 2024. The upside surprise led to an initial move higher in yields to start the month. Broader economic data released throughout the month painted a picture of a resilient economy—real GDP grew at an annualized rate of 2.3% in the fourth quarter, while the labor market appeared to stabilize, with the unemployment rate ticking down to 4.1%.

The fourth quarter opened with a stronger-than-expected jobs report (+254k) and accelerating inflation in both CPI and PCE, dampening expectations for aggressive Fed policy easing. Additionally, the fourth quarter saw market sentiment shift in response to the increased likelihood and, ultimately, confirmation of a 'red sweep' in the US elections.

As the calendar turned to the second half of the year, markets remained laser-focused on the timing and magnitude of the impending Fed easing cycle. Inflation and employment figures released in Q3 supported the idea that the Fed would begin to cut rates soon.

The second quarter began with a stronger than forecast employment report, indicating solid job gains and revisions upward for previous months. Additionally, the April 10th release of the March CPI came in above forecast at 3.5% and continued a string of higher-than-expected data.

While APA looked to extend duration across strategies for much of 2023, with ratios on the rich side of historical averages to start the year, and the fixed-income markets being well ahead of Fed messaging for rate cut expectations for much of the start of 2024, we remained more selective on duration extension trades to start the year.