Broker Check

Market News & Commentary - From the Desk of David Loesch 06.06.2024

June 06, 2024
  • A surprise report from BB Monday asked after the May 1 FOMC meeting decision about what factors might lead FED officials to cut rates earlier than planned. BB indicated a surprise might be in store from a rate cut standpoint. As reported, several FED officials seem to believe the labor market is still too tight; BB believes job growth was overstated by 730K last year, with hiring maybe falling to zero by October. Much of this downward revision will be due to business closures. This is an interesting piece, and we should have much better clarity by Friday mid-day post jobs numbers. 
  • Second half 2023 business hiring slowed down according to BB due to slow business formation, factors in the payroll prints does not take this into account. With the same factors at work this year, BB estimates the true job growth will be currently below 100K a month… this is perhaps why we saw (despite heavy issuance) a large rally yesterday.
  • As we know, T bills (and MUNIs) fell further in yield on Tuesday after a report showed an unexpected slide in US job openings. Overall, some are now calling for a July rate cut. I continue not to see this happen unless job numbers come in much worse than expected this Friday, which most likely will not occur.
  • Speaking of jobs, US job openings fell in April to the lowest level in over three years. I suspect this moved the markets as well. This is consistent with the gradual slowdown in the labor markets. The JOLTS stat reported labor numbers, pushing yields lower while creating a “dovish” tone in the markets. The bottom line here is that if this continues, despite the cut might not come until the EOY, the markets will/should continue to rally on the anticipation of any cut.
  • BB pushes out an article indicating Bond Traders are tilting “dovish” again by moving money into Fixed-Income securities that would benefit from a rate cut. The 10T has moved down roughly 25 bps over the last few trading days, and the cause of this has been the Fed’s preferred inflation gauge remaining steady and measures of manufacturing productivity coming in lower than expected.
  • More than 150K households filed applications in the span of 12 hours for a chance to join the NYC waiting list for a federal program that subsidizes housing. In the bond world, this is called Section 8. NYC has long been at capacity for this program. These bonds typically do well in the MUNI market as they are partly government-subsidized. MUNIs are a big part of these types of financings and historically have done well due to governmental subsidization.  However, the space left to build structures to house section 8 housing is few and far between.
  • One of the FED’s data points they also look at is mortgage applications, which continue to slide. Multiple pieces of news (Labor, Mortgage, factory orders) are starting to push towards a Dovish tone. We continue to have a divided FED, and in my opinion, we will continue to see this type of behavior until all pieces of data are aligned in the same direction. 
  • Moody’s has revised the outlook for the US Mass transit sector.  This sector was hit hard for those who traded during COVID, and bonds traded cheaply.  As people return to work, ridership and funding prospects continue to improve.  DRL bought MTA’s all through the pandemic and thought this system was “too big to fail.” So far, those buys have worked out.  I suspect this sector will continue to do well, and bonds should perform well over the next couple of years.
  • We have been buyers of airports for quite some time; during the pandemic, paper was obviously traded down in price; however, with the resurgence of travel, pricing continues to perform well.  As the summer travel season kicks into high gear, many airports are issuing paper over the next few weeks to raise billions of dollars for upgrades and fixes they can no longer put off.  Overall, infrastructure maintenance is at the top of the list; this will create another surge in issuance, and some of the paper, I suspect, will be subject to AMT.  Overall, the market will most likely easily absorb this paper, but it could put slight pressure on the market from a yield perspective.  

The bottom line is that rates have moved lower on the heels of recent economic numbers. The job numbers coming out on 6/7 will prove to be very important, and it will be interesting to read about any revisions that might take place. I suspect we will see rates over the next few months in this trading range of +/—10 bps and no rate cut until after the election. Again, no one really knows. 

 

 

 

At The DRL Group, we specialize in helping high-net-worth investors maximize tax-free returns by proactively maintaining their custom bond portfolios through all market conditions.

 

 

David Loesch

dloesch@drlgroup.net

www.drlgroup.net

605-B Park Grove

Katy, TX 77450

866.664.4040 (toll-free)

281.398.8600 (direct)

 

 

 

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