Patience Required
You knew it was too good to be true. Any remaining thoughts about a rate cut in March have been completely quashed by the recent comments from the Fed Chair. However, the optimism remains that there will be cuts later this year. Even a cut in May is not completely probable. Cuts in the last three meetings of the year appear to be the most probable.
The basis for the timing hesitation has to do with the strength of the economy. Employment continues to increase with the latest reading being well beyond estimates. Unemployment remains steady at the 3.7% mark. Incomes continue to grow but at a more moderate pace than when we were emerging from the pandemic.
It has been a confusing time since factors change week by week. We were rallying for a time with the drop in rates. After the Fed meeting and the employment report, rates were on the rise again. The ten-year Treasury is now at 4.15% and it had been as low as 3.84% within the last month.
The positive aspect of the lower rates was that municipal issuers returned to selling bonds in January with a 16% boost over last year and one of the highest volumes for the month of January in years. Whether this pace may be sustained throughout the year remains to be seen. We would anticipate another positive boost in volume when the rate cutting behavior returns.
The turn in the calendar and the change in the market tone was enough to get municipal investors off the sidelines with large positive inflows to the municipal mutual funds. Investors are focused on the prospects for falling rates at the shorter end of the curve. We are not likely to be upwardly sloping on the curve just yet, but this phenomenon could occur at some point later this year.
We have a little over a month until the Continuing Resolution expires once again. There is more talk about finding a path to addressing the border controversy and funding the war funding efforts but none of these initiatives are close to passage at this point. As the political rhetoric ratchets up with the political calendar, it will become even harder to find a meaningful compromise as flawed as it may be. The President’s polling numbers may present more challenges to leading to a deal from the top. Even at this point, one cannot rule out a government shutdown.
Budget numbers are being formulated and the economic assumptions are staying in a narrow range. We have confidence that most budget gaps will be successfully closed. The fundamental question is how much reliance there will be on drawing down fund balances. Since few pundits are predicting recession at this point, draws on reserves will have ample time to be replenished over the course of months or a year.
Equities continue to command the lion’s share of investors’ attention. Earnings remain positive but are anticipated to be not as robust as last year. Tech still holds the focus for the most outsized returns but said returns are very company specific.
The recent return of attention to fixed income is encouraging. Regarding individual bonds any extension in duration is beyond the short end to the intermediate except for the institutional crowd.
We think it is steady as she goes except for external shocks and any political mayhem. We look forward to navigating throughout the year.
John Hallacy
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