- I suspect we will continue to see rate volatility in the 2H of this year as markets contend with stagflation fears and the growing risk of a recession. Ultimately many think the yield curve will flatten and possibly invert. The FED should continue to increase rates; however, the question will be at what pace. Some are now thinking it will be 50bps in July. I continue to believe it will be 75bps. The slowdown in consumption will be a welcome site by the FOMC members as they see it helping slow the generalized price increases.
- BOA predicts a turnaround is ahead in our markets. The bank's MUNI strategist sees "strong Muni rate market performance in the summer" as they cited the rally in T-Bills. Bonds are advancing on concern that the FED will tighten too much, triggering an economic slowdown. A stable or bullish Treasury market would be the prerequisite for returning a more constructive Muni rate performance. BOA said this criterion was met last week. Morgan Stanley, BlackRock, and Nuveen have also stated the same. I would continue to be cautious; however, more and more Broker-Dealers indicate that MUNI markets are oversold.
- Belle Haven Investments, at a conference on Friday, also indicated the MUNI market has been oversold and poised for a rally. They site a chance of recession along with the poor performance this year, seeking yields moving down over the next few months while getting into a "normal" trading pattern. I have seen fund outflows declining, and many believe we will see inflows pick up over the next 30 days.
- Visible supply begins the week $10.6B below the average of $12.3B; again, this is not a surprise; we will see less issuance as we move through the next few months.
- Two weeks have passed since the 75bps move. The factors which drove that move, high energy prices and inflation expectations, have reversed. Crude has fallen back to Early May levels, and many believe the CPI numbers will also drop this month. These developments some feel should bolster the case of the FOMC to downshift rate hikes from 75 to 50bps in July. Significant data revisions in energy pricing are not new; some would claim inaccurate data contributed to the FED's misreading of the economy in the 1970s. What is different today is that the FED is trying to correct the economy too quickly while perhaps not paying attention to the data quality.
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