Slap happy tariffs
Not since the slapping incident at the Oscars has a tariff been slapped on so quickly. The tariff on the Eurozone is more global in scope. It appears that we hit allies fairly hard with tariff levels. One observer in the Wall Street Journal pointed out that there are no reciprocal tariffs assessed on Russia except for the baseline tariff.
In terms of a ploy to get concerned participants to the table it has worked for now. We will see what happens beyond July 9.
I am beginning to be more concerned for retailers and vendors for what the tariff mosaic may come to mean in terms of sales. Retailers already have quite a bit to track with the varying sales taxes imposed in the states and how they change over time. Of course, the tariff is indirect at the retail level and is more direct at the wholesale level. Nevertheless, varying tariffs levels will have an impact on sales. I wish I could be more deterministic about what the effects on the sales tax receipts will be from the tariffs. We will just have to wait and see but one has to suspect that it will be negative. The question is how negative it will be. Most retailers will not be able to “eat” the tariffs in the way that some of the large corporations will be able to do.
In the midst of all of this activity we have had a downgrade of the credit of the USA. In the past we have had robust discussions about whether the states should be allowed to have a higher rating than the sovereign credit. This point has been mute at present. But one has to appreciate that some of this influence weighed in the downgrade of Maryland. The federal layoffs of employees who reside or work in Maryland was cited as one factor in the rating action. Other states may be affected but it is always a combination of factors that contributes to such a significant change.
It was not uncommon in the market in days past how Maryland would trade through the AAA level by a fair amount. Perhaps, some recalibration of risk will follow this change.
The SALT affected legislators had their voices heard in the budget process with the cap being raised to $40,000 with certain income limits to be applied. This action should be viewed as a success for those states. The greater challenge will be what preserving and expanding the tax cuts will bring about for Medicaid spending. Eliminating fraud and abuse and having a work requirement for able bodied individuals is acceptable. But eliminating 7 million from the Medicaid rolls will have considerable impacts that may not be fully known or understood at this point.
Then there is the debt ceiling discussion and lifting that needs to take place. Since the House version of the budget will add to the deficit and will require more funding from Treasury bonds to be issued, the ceiling should not be too low. However, given all of the consternation over tariffs, we need the global buyers to continue to have an appetite for Treasury paper. There was some discussion about additional purchases by Japan this week. Hopefully, this trend will be sustained. We need to gauge China’s interest carefully.
Rates continue to be in a range even though the levels are at the higher end of the range. Employment continues to be relatively stable. So far, inflation has continued to stay in a somewhat lower range. This stability may be unsettled when the higher level tariffs actually go into effect. The FED is watching. Many pundits are anticipating one or more easings by the end of the year. No one may be very definitive at this juncture.
Turning to the municipal market, inflows have turned positive once again after the effects of tax season. June and July are heavy redemption months so there is every reason to expect that issuers will want to sell into the strength. Volume should be steady at a somewhat lower level even giving acknowledgement to the fact that the municipal exemption remains intact.
The increase in the endowment tax raises some concern. The modest annual draws on higher education endowments may need to be revisited. The 5% threshold may no longer be a given. The cutbacks in federal funding will have a very direct role. Boards will be hard pressed to find dollars. Endowment portfolio managers will be facing even more pressure to attain and to exceed investment return targets. PMs are already engaging in a lot of investing in private equity and alternative investments. Raising the risk profile must be balanced against the need for returns. The task is never facile but it will be even more challenging going forward. The raters and the buy-side will be monitoring more closely than ever.
John Hallacy
John Hallacy Consulting LLC
05/28/25
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