Modicum of Relief
The tone this week has changed radically from the negativity that prevailed last week. A couple of notables have been weighing in that the economy is not broken and in fact it is continuing to perform well. Wages are up and many jobs continue to go unfilled.
But there are some warning signs that there is change on the horizon. Some tech companies have begun layoffs either because of supply chain issues or because demand has begun to soften. Despite how you may proportion the rationale to the relative components, these actions represent some real change. Tech has created many jobs in recent years.
Housing is also encountering some change in the air. Mortgage rates have climbed precipitously, and the higher rates are starting to have some measurable effect. Home sale were negatively affected in April and for the first time it was not due to the lack of inventory. Affordability is key. The difference between carrying a 3% mortgage and a 5% mortgage has a significant impact on cash flow.
The housing slow down will have implications for state and local credits. For the latter group, the rapid growth of assessed valuations may be coming into a new slower growth phase. Even when housing turnover is slow to be reflected in the tax rolls, there will be a negative effect in the shorter term.
The Fed continues to reinforce the goal of 3X 50 basis points hikes is a comfortable position to maintain. The housing sector is the first to begin to reflect the changing rate environment.
All eyes are watching to see if the slowing turns into recession. We have some time before a full-fledged recession would begin.
The retail sales report out of a couple of large retailers last week were also a stark wake up call. However, this week some of the smaller retailers and niche retailers have been exhibiting a bit of strength. The wealth effect has provided some underpinning for the higher end retail shopper.
The big-ticket item of autos continues to struggle with the supply chain issues and sales had already been forced down. A portion of the “bubble” pricing of used cars appears to be abating.
Most believe that Americans will take to the roads this weekend despite the inflated cost of energy. Ennui sometimes is a greater motivator than price.
Municipal Activity
Issues received more favorable pricing this past week with the moderation in rates. We know that this circumstance will not last while the Fed is making its moves in June and July. The rollover will provide a lot of cash from maturing bonds in those months that will need to find other securities for reinvestment. Some of the flow may go to other markets but where is the question.
Outflows from the mutual funds have continued at an elevated level of $5 billion. We may see some inflows in the months ahead given the prospective returns should be improving to an extent. But valuations will still be subject to negative forces.
Municipal volume in May of $28.8 billion is a decline of over 18% from last year. Transportation, Utilities, and New Money have all increased albeit the latter was modest. Issuance was down in CA and TX while issuance in FL was relatively flat.
The states that increased issuance were GA, HI, KY, LA, MI, NV, and SC. We would expect the larger issuing states to be selling into the rollovers in June and July.
Given many states and localities are in surplus mode, we would expect seasonal short-term borrowing to be down by a significant amount in this cycle.
The decline in the 30-year Treasury to below 3% at 2.985% has given a bit of a positive factor for the long end buyer.
Have a good holiday weekend and stay safe.
John Hallacy
John Hallacy Consulting LLC
05/26/22
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