- The FED raised rates .25 and signaled six hikes for the remaining year, launching a campaign to address inflation. Policymakers voted 8-1 to lift their key target range to .25 to .50, citing the first increase in rates since 2018 after two years of holding down borrowing costs. I suspect (as Powell indicated) there will be several hikes to come this year; however, Powell also pledged to be "nimble" considering the delicate state our world is in now.
- The FED faces the arduous task of securing a soft landing for the world's largest economy for the first time since the early 1990s. With the Ukraine/Russia conflict, the implications for the US economy are highly uncertain at this time. Still, the invasion and related events are likely to create additional upward pressure on inflation and weigh on economic activity in the near term. If the Fed tightens too slow, it allows inflation to run out of control, too swift; the Central Bank could roil markets and tip the economy into a recession. Many in the street are starting to predict this could happen due to the inflation numbers/rate moves we could see over the coming months.
- Morgan Stanley raised its oil price forecasts for the latter half of 2022 and 2023, citing tighter supply/demand balances worldwide. The bank increased its 3Q price to $120 a barrel, up from $100. This point will affect the overall market as rates and oil move, putting added pressure on all markets.
- The recent surge in bond yields makes it harder for companies and governments to borrow funds in the US debt markets. This issue will worsen as the FED hikes rates, which could slow the underwriting of corporate and MUNI bonds. This point could be a net positive for our markets. We already know about the slowdown in new issues; I suspect this will be magnified with the rate hikes over time. Companies at this time are "standing down" based on these yield moves.
- Almost every day of 2022, investors have been greeted with a significant amount of bonds for sale. This selling pressure has been driven by nine weeks of outflows from MUNI funds is the longest stretch since 2018. We are getting pressure from fund managers who must meet redemptions from their funds. Last Thursday marked the 19th day where the number of muni bonds out for the bid reached at least $1B. This point is a strong reversal from 2021, where it only happened twice. This issue has created a large spread between the Bid/Ask, causing evaluation prices to decline.
- A reference to the point above, the level of bonds out for the bid in 2022 still pales compared to the steep pandemic induced selloff in spring of 2020, where the amount was averaging $4.1B for several weeks.
David Loesch
dloesch@drlgroup.net
605-B Park Grove
Katy, TX 77450
866.664.4040 (toll-free)
281.398.8600 (direct)
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