- The Government Finance Officers Association is considering options for Congressional legislation that could offer a vehicle for reviving tax-exempt advanced refunding, an essential debt refinancing tool used by many municipalities. Should this get passed, this will be a net positive for flow in our markets and will help new issuance. These provisions were removed from the Democrats Build Back Better program, stalled after moderate lawmakers voiced opposition. Overall, the market depends on this "piece of law' to finance paper through the system and should get passed.
- Many economists surveyed see top-line and core PCE inflation subsiding over two years. The median forecast calls for inflation by either measure to slow to 2.30% in 2023, only a quarter-point above the FOMC's target and indistinguishable from the median forecast from FOMC participants. The median unemployment rate is forecasted to edge down to 3.50% by the end of this year. This point is good news for all FI assets; even more important, the survey indicated the FED would not need to be doing much "heavy lifting" to bring about these favorable outcomes. As we know, inflation has been the "hot topic" in many conversations. Understanding exactly how this will impact our markets is critical. Many believe that the inflation fears are somewhat overblown, and we will see things getting back to normal 3rd Q of this year.
- IMO some of this market volatility we are seeing is a direct result of Russia mounting thousands of troops near the Ukraine border. Russia has indicated they will "not invade" Ukraine. However, many in the EU have a different opinion. The US stated yesterday they may put as many as 8500 troops on alert for deployment in eastern Europe as tensions remain high. This issue will move markets and is worth keeping a very close eye on.
- Home pricing gains are beginning to slow after a long stretch of YOY accelerations. However, home prices grew 18.40% YOY in October, down from 20.00% in July. In October, price gains continued to be strongest in the South and Southeast (both at 24%). However, if consumer confidence drops due to the Omicron Variant, we will see these price increases start to slow significantly.
- Visible supply continues to be low, starting the week off at $9.9B compared to an $11.4B average in 2021.
- This will continue to put a "damper" on supply through the first Q of 2022. I expect this to be the norm for the time being.
- Municipal credit will enter one of the strongest years it has seen in decades, primarily due to the government stimulus. The "base case" is credit will continue to improve through the year, causing investors to buy more paper. One caveat is paper issued to finance speculative projects like private train lines and retail shopping centers. We continue to be buyers of High-Grade credits in the Tax Exempt markets.
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