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Market News Commentary - From The Desk of David Loesch 08.27.2020Submitted by Tax Free Municipal Bonds/Fixed Income Specialists/DRL Group on August 27th, 2020
- The FED indicated they would likely keep short-term rates near zero for five years or possibly more after adopting a new strategy for carrying out monetary policy. The new approach is likely to result in policymakers taking a more relaxed view towards inflation. Powell will provide an update on the FED's 1.5-year-old framework of its policies and practices when he speaks today to the Central Bank’s Jackson Hole’s Conference.
- A policy change mentioned above would introduce a longer run risk of de-anchoring inflation expectations. The FED realizes that higher bond yields and stock prices mark a sharp contrast with the real economy, where companies lack pricing power. An inflation target overshoot of 2-3% probably would not result in the same extent of "runaway price growth," as seen in the pre-Volcker days of the 1980s. I feel the FED has inflation under control and cannot afford the rates on US borrowing power to move up much above 1.00% on the 10T for the next year.
- With higher education starting back in the next few weeks, it will not be easy to keep enrollment at capacity. Some universities are reporting between a 5-15% drop in enrollment for the Fall 2020 semester. S&P remains negative on this sector, as they expect a net decline in tuition revenues.
- MLCO increased its 2020 green bond new issuance target to $17-$19B from $12B. As multiple fires burn across California and Colorado, many including myself believe that this security type will become more prevalent throughout the balance of this year and into 2021.
- Issuance of taxable muni's slowed down recently as muni/T bill ratios collapsed. Year-to-date taxable muni issuance volume is $80B or $10B larger than the full year of 2019. The target taxable muni issuance for 2020 is $105B.
- CA launched a new pooled Tax and Revenue Anticipation Note (TRAN) financing program for K-12 school districts. This deal also includes community college districts according to the news release. This financing is happening as the current state budget is deferring school district payments due to lack of funds; these TRANs could be used to fulfill schools' cash needs and avoid shortfalls. I would expect this to be happening across the country as we move into the fall.
- According to NY's first Q update for its FY21 budget, state general fund revenues anticipate a decline of $14.5B versus the state's February budget of a $1.2B drop. This information primarily reflects lower anticipated tax recipes of $931MM and shows weakness in sales and use tax collections and $288MM less in the lottery and commercial gaming revenues. S&P will be analyzing these numbers, and I expect the state to go onto negative Credit Watch over the next three months.
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