War is not Science
We have seen in recent days that war is not anywhere close to having a scientific basis for course determination. We are just not drawing any closer to any reasonable basis for closure in the case of the Iran war. The will to do so is present. But the negotiations are so nuanced that the parties remain far apart. Although media reports are maintaining that there has not been much of a pronounced effect on the markets. Although it is certainly not the only factor, the ten-year Treasury has passed the 4.5% mark and is poised to remain above the mark for the near future.
The other important contributor to the path for rates continues to be dominated by Fed action or lack thereof. We are now supposed to make informed decisions from the markets and not what the Fed may inform us. Nevertheless, most pundits agree that the trend is for higher rates later this year.
What is a bit comforting is that the economy is holding up well despite growing concerns. The lower level of employment growth has not weighed heavily so far. Retail grocers are being praised for taking some action to lower prices at their own initiative. Jawboning may create some pressure to change courses, but it appears to be more about making staples more affordable to make up the price breaks elsewhere. How long can this approach last? This may be the strategy for a quarter or two.
The energy price decline has been welcomed by consumers but there is also some belief that the change will be ephemeral if the war is not concluded in the near term.
Market Commentary
The equity market continues to attain new highs with some level of daily volatility as part of the landscape. AI is underpinning a lot of the positive momentum despite lingering concerns about whether productivity gains will be forthcoming in the future from the expected applications. IPO’s have been oversubscribed many times.
An added feature of the current climate is that the exceptionally large bond offerings in the corporate market have been easily absorbed. Initial pricing has held or improved on the break despite the significant size of these transactions. An investment grade rating is most helpful in this regard despite comments from some who debunk the importance of such a rating.
As for the municipal market, news reports and global developments have not unsettled the market very much. Issuance of $299.2 billion for the first half if continued will result in higher volume this year than for last year, which may produce a new annual record. Issuance of $10 billion a week or more except for holiday weeks seems assured.
We view some resistance to accepting growth of new data centers to be an interesting phenomenon. The centers do not employ many, but they would contribute to the economy through taxes and other means. One factor that needs to be considered is the large water requirements. Driving up power prices for retail consumers is another factor.
Proposition 41 in California would raise the approval threshold to two thirds for special taxes. We appreciate the desire to contain taxes but if successful it will be one more requirement that the locals will need to manage with.
Given the transportation bill re-up has had slow progress, we look forward to any emerging developments. In the meantime, NY Thruway and NJ Turnpike are on the calendar for next week, Municipals still offer the lowest cost financing option if available. We will see where the deliberations about engaging in more P3s evolves at the federal level.
John Hallacy
John Hallacy Consulting LLC
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