Feeling Bad about Good News
It is hard to fathom at times how citizens can feel so bad about the economy when most economic indicators are reflecting a lot of good news. Yes, we agree that inflation remains slow in descending and supermarket prices are almost absurd, especially in central cities where there is not as much competition. The housing market for those who are entering into it for the first time is quite dear with mortgage rates over 7%.
But how about the fact the equity markets are at all-time highs. Most workers who have 401Ks with their employers should be feeling positive about the status of their accounts even if they adopted only a moderately aggressive portfolio approach.
What about the strength of the job market. Employment ticked up in February by 275,000 for a level much greater than anticipated. It is true that the unemployment rate increased to 3.9% but from a historic viewpoint is still quite low. It is also true that wage growth continues to moderate in post pandemic mode. All these readings have not pressured the American consumer in most respects. The luxury market is experiencing some slowing, but the impact on the companies has been muted so far.
How are markets absorbing all this news? The answer is quite well. The ten-year Treasury has declined to 4.07% from recent highs. The short end remains stubbornly high. Any change in the inversion in the curve is taking some time. The higher short-term rates are the main explanation for why so many investors have been keeping so much cash in money market funds. The $6 trillion in money markets will at least be partially redeployed to other investments at some point. Some of those conservative funds should find their way to the municipal market.
The market continues to anticipate a Fed easing later this year. Although there will not be as many cuts and they will not be accomplished as early as the market anticipated earlier this year. The impact of any pending action remains quite positive.
Perhaps, some of the negativity may be because the federal government continues to run outsized deficits that will need to be addressed at some point. Treasury issuance continues to accelerate to fund the imbalances. The market pressure from the additional supply has not been so great as to affect the market outcomes. The paper is being placed but there is growing awareness that finding sufficient buyers will be an increasing consideration.
New climate disclosure rules have been promulgated by the SEC for corporations. As defined, Scope 1 rules focus on emissions from operations and Scope 2 rules focus on associated emissions from energy purchases. In both cases, there is a materiality standard. One of the main thrusts of the disclosure rule is to “standardize” the disclosures so comparisons may be more easily accomplished.
Other information required under the rule is comprehensive. There must be discussion of what are the material impacts, the actual and potential effects, and the ongoing mitigation efforts.
Establishing targets and goals for reducing impacts becomes especially important. To do so, there must be a system in place to identify, assess and manage impacts. Severe weather impacts must be treated in their own section.
Ultimately, all this reporting and managing is intended to assess the impacts on the financials of the companies reporting. Detailed notes to financial statements dealing with this content must be developed and included in required financial statements and ongoing disclosures.
There have been calls and increasing requests in the municipal market for greater depth and completeness of climate change events and impacts. Although the SEC rule does not specifically apply to the municipal market, what takes place in the municipal disclosure category is often viewed from the prism of what is required in other markets. On the surface, Scope 1 and Scope 2 reporting may not be easily applied in the municipal context. But the outline of the requirements may be followed to a certain extent.
None of the progress in this regard will unfold quickly in the municipal market in the future. We may all agree that there would be benefits to some standardization of the disclosures. Yet, in municipals not many items are standard. One that does come to mind is the GASB disclosures and reporting requirements. We often have many variations on the theme regarding disclosure in the municipal market. Secondary market disclosure has come a long way since adoption but standardization remains a goal to aspire to over time. Only a limited number of disclosures are specifically mandated.
One aspect of climate change disclosure is certain. Over time, there will be more work for issuers and their legal representation.
The State of the Union message included many aspects to be noted. Of interest to the fixed income markets is the call to raise the corporate tax rate back to 28%. Then there is the whole discussion about whether the 2017 tax cuts will be continued after sunset in 2025. We know that the federal government is on the hunt for additional revenue. The answer in part will be determined by the prevailing politics of the time. The additional funding for addressing the wars and more aid to be directed at improving the border flow and conditions has a substantial price tag.
Step 1 of the budget process has largely been completed. Step 2 will be more challenging. There is less of a chance of a government shutdown but it cannot be ruled out entirely. We should be preparing for one if it comes to pass.
At this time of year, we start to experience the uptick in issuance. Next week we have three transactions in the healthcare space over $1 billion and an exceptionally large $2.9 billion transaction from the Dormitory Authority of New York State. These issues are coming at a time when rates are moderating and rollovers should be increasing. The paper should be placed efficiently.
John Hallacy
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