Mid-year and Mid-term Pressures
It has become especially clear that the mid-term implications are beginning to become more critical to what will unfold in the weeks ahead. The push for more reforms and more funding from the Democratic side of the Congress has largely been thwarted. Some pharmaceutical price reforms will help seniors. But most of the rest of the agenda has stalled. We should expect some last-ditch efforts before election day, but the prospects have been greatly reduced.
All eyes are on the Fed, inflation, and the economy. Although some have put forth the idea of 100-point hike it does appear that 75 basis points is a lock. In the meantime, before the meeting on July 26, we have experienced some moderation in rates especially in the ten year and on the long end but not on the short end. The mild inversion should be expected to persist.
The fight to bring inflation down does not appear to be making a great deal of progress given the recent 9.1% inflation reading. There has been some modest improvement in fuel prices, but most other inputs have continued to increase. Has anyone seen any bargains lately?
One area that is showing strength is the summer travel season. Bookings for flights, hotels, and excursions are rising in the near term. Localities that have a focus on seasonal travel should be experiencing some relief from the increased traffic. But as one scans the offerings, there are not many deals to be had.
The war in Ukraine continues to rage. No one knows how it will end but any end is a good distance away.
Heavy outflows from the mutual funds appear to have attenuated to a degree. Losses for the year have moderated but remain in the 8% range.
What has been encouraging is that more large transactions have come to market or are on the calendar for before the Fed meeting. The structures being offered are providing a greater range of securities for investors to select from.
Drought, fires, excessive heat, and hurricanes are garnering the usual seasonal media attention. Water management in the West is of particular concern. Conservation helps in the near term, but more must be done. Building underground storage is expensive but may become even more necessary to maintain the integrity of water systems. Climate change is having an impact but the spending to address the issues is not keeping up in many instances.
We have not heard much about the status of spending under the Infrastructure Act. We know that lining up the spending takes time and there are not as many shovel ready projects as advertised. It would be helpful to have some progress report in hand.
The place to be remains on the short to intermediate part of the curve in municipals. Spreads continue to be in a narrow range and are not likely to change appreciably in the near term.
We have concluded the fiscal years that ended this past June 30 for most states and localities. We will not hear too much about the preliminary results until the Fall. We have heard of outsized surpluses in states such as California. We certainly never hear about the imbalances early in the cycle. Although disclosure has improved, the timeliest information that is provided is still connected with a sale in the primary market. The bulk of the audits for FY2022 will not be out until January.
In the meantime, if we can avoid a recession, governments will have a relatively trouble-free start to FY 2023. Inflation effects on purchasing power and hiring concerns for governments will be continuing.
The tone towards an improving municipal market is taking hold and higher rates are attracting more buying activity. But it remains to be seen what the effect of the Fed move will be at the end of the month.
John Hallacy
John Hallacy Consulting LLC
July 18.2022
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