Discovering the New World Order
On so many fronts these days we are working towards a new world order. The challenges have never been greater.
When the Dutch arrived in New Amsterdam or what would ultimately be called Manhattan, the business proposition was about establishing a beach head to conduct trade. Success was measured by the quantities of beaver pelts that were obtained. The key trading partners were the Native American tribes. The parties had to establish a level of trust.
In the AI world the stakes are quite high and the level of trust required is quite high. The investment necessary to bring about the eventual productivity changes is at a level we have never witnessed before. The down draft in tech last Wednesday was a test.
The tech sector and the NASDAQ have bounced back. But the second guessing about whether all this investment will produce returns lingers and may flare at times.
GDP growth of 1.5% last quarter was a bit on the anemic side. Reports inform us that a great deal of the growth was related to the AI investment boom. Although, consumer spending also remained solid. We will see if growth re-accelerates over the course of the year.
There are some strong potential foils to the growth. First up will be the actions taken or the lack thereof by the Fed. Given the ongoing lack of forward guidance which the bond market has taken quite badly, there still appears to be a bias towards higher rates. As the Fed Chair suggested, the market is already doing some of the heavy lifting. The ten-year treasury is at 4.72% for a recent high. One of the consequences has been that mortgage rates are now at one-year highs. We have not seen the thirty-year treasury at 5.26% since the financial crisis. The two-year treasury at 4.28% is forcing the front end of the curve to be a bit steeper. But the essential story is that the entire curve has shifted up.
Most pundits are now suggesting there will be tightening, but it may wait until next year.
Other foils include the two wars and the ongoing volatility in the oil markets. Progress is slow on both theaters and negotiations with Iran are on again off again. Progress in Gaza could lead to some improvement in stability. But the free flow of vessel traffic in the Strait of Hormuz and on other bodies of water is tenuous at best. A continuing resolution should keep the government on track.
Municipal Matters
Visible supply has been steady and increasing to a degree. Twelve billion to fourteen billion a week appears to be what is anticipated. We have two transactions this coming week in the billion-dollar range in Colorado and Michigan for healthcare. We may have some more activity in the sector before the federal budget forces more change. The additional billion-dollar transaction in the mix is for New York City GO.
There have not been many rating changes of note recently. Some of the changes have been a notch or a change in a modifier. The high yield sector is providing more to examine as is often the case.
Keep enjoying Summer.
John Hallacy
John Hallacy Consulting LLC
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