Disruptive Factors
There are many factors unfolding that have disruptive elements associated with them. The recent CPI turned out to be not one of them. The monthly increase in the CPI was 0.4% and the y.o.y. result was 4.9% NSA. So, we had a tick down in the y.o.y. result. The annual CPI less food and energy remains high at 5.5%. The conclusion here is that inflation has been only gradually declining.
The impact on rates is there will be modest fluctuations in the range. Issuers tend to pick their spots to issue when they perceive there is a “window” to issue. Given we are post tax time and withdrawals from the mutual funds should be tapering off, we continue to see outflows week to week. This trend affects the market tone and the bid for paper. Rates are not on the decline but it appears that spreads are tightening to a degree. I cannot recall a time when the spread for Illinois state paper was within one hundred basis points over the AAA as it is at present. Part of the result is attributable to the recent upgrades.
The inversion in the yield curve is not as steep as it has been since the first sign of the inversion. The three months Treasury at 5.20% and the ten years at 3.43% still represent that there is a possibility of recession. The short rate is also reflecting the prospects for or lack thereof of a resolution to the debt ceiling raise.
The two sides that must act on the debt ceiling remain far apart. It is easy to jump to the conclusion that the job will get done based on the long history of doing so but there is some sentiment in the air that this time is different. The market is remaining calm and is anticipating a resolution. But any signs that there may be trouble ahead could change this stance very quickly. Another potential downgrade of the USA’s credit rating this time would probably have more of an outsized effect on markets. Two rating agencies having a lower grade is more meaningful than just one. The postponement of another White House meeting to next week is hopefully an indication that the two sides are working through the details to get closer to a resolution.
The economy is slowing only gradually. Some of the high-tech layoffs are affecting the wage base in particular areas such as the Bay area but have not affected the overall labor market to a high degree. We will see how well the new crop of college graduates will be absorbed soon.
The growing awareness of artificial intelligence is having a significant impact on equity markets. This change in tone appeared after the sharp interest and coverage of the Chat GPT function. I have not used the application to draft this article, but many have begun to experiment with the technology.
This awareness of the ability to change or “disrupt” the municipal market through technology continues to grow. Most of the efforts have been directed at pricing in the primary market and trading in the secondary market. But the more recent entries in the field have focused on the challenges of workflow. Making the transition of the writing of the ticket to the trade to the follow-on trading continues to be an area for improvement even after many of the improvements that have already been made in recent years. Bringing down the cost of trading in all markets is a goal of the regulators. More improvements are on the way.
In the meantime, we continue to be range bound in most markets. Municipal supply is not climbing sharply the way it usually does this time of year with only less than $7 billion expected next week. Resolution of the debt ceiling may serve to provide a basis for a modest rally.
John Hallacy
John Hallacy Consulting LLC
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