- Retail sales fell by more than forecasted at the close of the holiday shopping season, and this was no surprise. The value of overall retail purchases decreased by 1.10% in December after a downwardly revised 1% drop in the prior month, explaining why the market was on edge. The fixed-income markets reacted favorably, and now we have a clear runway ahead. Treasury Bills moved down in yield, and Munis were down 4bps on the long end yesterday. Munis are not currently keeping up with Treasurys.
- PPI also dropped in December by the most since the pandemic, extending a month's long pullback in inflationary pressures and giving the FED room to slow the pace of rate hikes. There was a time when everyone thought 50bps at the end of this month; however, now many are thinking 25bps. Should we see a 25bps move, I expect we will continue to see yields move to 4% on the long end and stall. Getting through a 4% will be hard to break.
- One of the main questions for the economy in 2023 is how the inflation trajectory will unfold. While the FED forecasts core inflation this year at 3.50%, the market's view is that it will be lower than that, particularly after Thursday's CPI report. Although, I have read reports where some economists expect us to hit the 2.00% mark this year. I suspect achieving 3.50% this year will be unattainable. However, as we move through the year, we will continue to see economic numbers come down, fueling rallies across the board as investors see the light at the end of the tunnel. I also believe the item which will "hurt the numbers the FED is seeking" is the employment numbers, which are expected to stay resilient this year.
- BOA indicated yesterday that they are increasingly optimistic about the US economy in 2023, prompting the bank to delay its recession call while expecting a slower pace of FED hikes. They continue to see a mild downturn; it will start about three months later and come with a lower peak unemployment rate. BOA also sees the FED moving rates up 25bps in early February, March, and May. If this happens, I expect our rally to continue in the high-grade MUNI markets.
- Interesting and "sign of the times" bond issue - Miami-Dade, FL, will sell 549MM of MUNIs to refund debt used to help finance capital projects at the Port of Miami, which happens to be the busiest cruise port in the world. It is good to see this issue come to market, as it is another sign that the world is returning to normal. This point comes after the cruise markets bounced back from a pandemic that stalled ships during COVID.
- Benchmark 10-year yields: CA 2.28, FL 2.40, IL 3.89, NY 2.34, PA 2.53, and T 2.55 - all down about 125bps, if not more, from the highs we saw in 2022.
- We recently reported about the Texas Permanent School Fund (PSF) getting close to the maximum limitations for it to continue to insure TX school bond issues. (See our blog from 12/15/23 explaining PSF bond insurance). The program rejected nearly all applicants to its debt guarantee program in November, marking the first time it turned borrowers away due to a lack of capacity in about a decade. Only 5 of 49 applicants were approved. The PSF dates to the mid-1800s; primary funds come from royalties on oil and gas extraction in Texas, which remain the dominant income source. This cap limitation will make new issue PSF-insured bonds scarcer until older bonds mature or get called. It is an issue that should resolve itself in the days ahead.
- I suspect part of the rally we have seen is due to a large influx of cash, the largest we have seen in more than a year, as demand is coming back into our markets. MUNI funds had a $2B inflow last week, the most significant since July 2021. This increased demand is a welcome site for MUNI bondholders and fund managers as MUNI funds saw a $144B outflow last year, the highest on record. We should continue to see this type of movement through the 1st Q of 2023.
- An interesting read with former T secretary Lawrence Summers said the US economy is still facing a recession this year despite encouraging news in recent weeks. He indicated that the markets need to be aware of "false dawns," He is sticking with his view that a recession this year is more likely than not. Many call for a "soft landing" as we move through the year. I would expect to see this as well; there was a time when "many" thought we would see a recession, but now, it is a question. I suspect we will see a slowdown, but not a "recession," creating a large inflow of jobless claims.
- Visible supply continues to remain low, starting the week at $7.2B. Overall averages are coming down and are currently at ~$10.5B due to the lack of products coming out of the primary market in the past several weeks.
David Loesch
dloesch@drlgroup.net
605-B Park Grove
Katy, TX 77450
866.664.4040 (toll-free)
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