- Over half of US states are using record budget surpluses to fund the most significant tax breaks in decades. Almost two dozen states slashed personal or corporate income tax rates in the past two years, and more than a dozen enacted temporary relief in 2022. These states could be risking shortfalls while trying to help residents combat inflation. The MUNI market will be watching this closely over the next two years. I suspect some states will be downgraded if this pattern continues. It will be important to know which states are under a financial strain, in addition to the states that could be "upgraded" for sound fiscal policy.
- As mentioned above, some analysts caution that swelling revenues result from temporary distortions. An abundance of FED stimulus money and a record stock market performance in 2021 drove an increase in income tax collections. These funds spurred consumer spending, but this will be temporary, and states must plan accordingly.
- Studying the 10-yr Treasury, most rallies since the high on June 14th occurred during early trading hours. The yield has fallen 65bps through August 1st during the hours of 7-11 AM EST time. I find this interesting, as this is most likely the direct effect of foreign investors playing a part in this dynamic move. I suspect US investors are taking profits in the AM hours on the T markets and MUNIs to go to cash or seek alternative investments. This activity is interesting, and The DRL Group sees a similar pattern with the MUNI and Corp markets. If you wish to know more, don't hesitate to contact us.
- US employers added 528K jobs last month and upwardly revised 398K jobs in June. This number was much higher than the 250K expected for July. With these numbers, the San Francisco FED Governor indicated the FED will still need to hike 50-75bps at the next meeting. Data-driven results will need to show a slowdown in CPI and job numbers. I suspect we will see another 75bps in September and most likely 50bps at the following meeting.
- Visible supply begins this week at $8.2B and continues to be well below the average of $11.2B. Supply will remain low through the summer and should pick up in October. However, 2022 issuance will be lower than 2021. These numbers should continue to help our markets.
- A Texas authority has extended a legislative deadline for a state agency to sell $3.40B in storm securitization bonds. The deadline is now the end of August. I believe the size of a deal like this will impact TX paper once it is priced and comes to market.
- CPI numbers for July, as expected, have come down primarily reflecting lower energy prices which should take the pressure off the FED. MUNI’s are up as we report this, while credit ratings remain solid. We have been buyers over the last few months; as we have published in past reports, we expected CPI numbers to move lower.
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