- Longer-dated high-quality Munis are the most defensive buys against a downturn. Trying to keep the coupon as close to 4% will offset any decline we might see in yields as it relates to the Treasury markets. I suspect we will see "junk paper" trade-off over the next 6-9 months with these buyers moving their assets into the higher-grade MUNI markets. Most importantly, MUNI credit is positive, and corporates will feel the brunt of the slowdown sooner than later. MUNIs always have a delayed reaction; we will see this as we move through the back half of this year.
- Another steep drop in job openings in June is a point supporting whether openings can fall without a substantial rise in the unemployment rate. While this is a hint of a soft-landing outcome, some expect the FED will do "more" to rein in inflation over the next five months. JOLTS fell by 605K to 10.7MM in June; this is why we saw the market turn yesterday. This level is still well above the average of 4.50% and signals demand for workers outpacing supply. However, what the openings rate does suggest is that most of the openings are in the service and retail sectors.
- China’s announcement of military drills around Taiwan as Pelosi visits the island creates ripple effects across global supply chains. Gas suppliers and cargo are rerouting ships, which will be an issue should it continue and something to watch over the next couple of weeks. These actions will keep investors on their toes while seeking higher-grade securities.
- Just five months ago, the state of California was facing a budget surplus and record tax collections. A slowdown in the economy and the slumping stock market chipped away at what had been the surging tax revenue. Now, the state is likely to see a revenue shortfall from its three primary tax sources. The shortfall is from personal income, corporate, and sales taxes. Californians are moving out of that state and hurting the state's budget as taxes will likely trail by $5.5B budgeted for the year ending June 30, 2023. One aspect, however, is CA’s rainy-day fund; we do not expect this to impact the MUNI debt of the state anytime soon. However, over time CA paper could get a bit cheaper.
- As we move through the month, I think the Asian markets will continue to fall, putting pressure on UK and US while driving the T bills to 2.50% on the 10-year. With the escalating US-China tension over Taiwan and deepening worries about a global economic slowdown – investors are moving to T bills and safer investments. Stock indices across the globe are falling based on the fears of economic issues caused by global tensions. I believe as these remain, we will have a long runway for MUNI markets as bonds strengthen.
- US consumer spending barely rose in June after falling in the prior month, underscoring how decades of high inflation have eroded Americans' paychecks while tempering demand. With consumer spending down, mortgage applications down, and profit warnings from large companies such as Walmart, Best Buy, Target, and the like. I think these types of numbers will put a drag on CPI this month.
- Supply will continue to be low as we move through this month. Typically summers are slow for new issuance. Visible supply will begin the week at $8.2B, well below (again) the average of $11.2B. This lower supply should also help our markets, as investors will be seeking to buy back paper which has been called or matured.
- Mortgage rates in the US dropped for the first time in three weeks. The average for a 30-year loan slipped to 5.30% from 5.54% last week. Rates overall have climbed from 3.11% at the end of last year and are starting to cool the overheated housing markets. Purchase demand continues to tumble as the cumulative impact of higher rates, elevated pricing, increased recession risk, and declining consumer confidence takes a toll on the homebuyer. I suspect this will continue through the year; however, I also expect mortgage rates to move down slowly between now and December.
- Investors added $263MM to MUNI bond funds in the last week. The previous week saw outflows of $633MM; this is another sign that investors like what they see in the markets. We have been saying this for three months. Muni’s have simply gotten too cheap; investors are now starting to take notice.
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