- The CA state nonpartisan budget advisor warned they would likely see a $25B deficit in its next fiscal year because of slumping revenue. The FED's rate increases have slowed the economy resulting in lower stocks, falling home prices, and less demand for items such as cars. The agency is projecting a deficit which would be the first since 2018. I do not expect this to change the outlook of the bonds; however, it is something to watch.
- US retail sales posted the most significant increase in 8 months in October, indicating demand for goods is broadly holding up despite decades of high inflation and a worsening economic outlook. I suspect this is why you see yields up a bit today on the T markets, and I expect we will also have a minor pullback on yields in the MUNI markets.
- JP Morgan indicated yesterday the US would enter a "mild" recession next year thanks to interest rate hikes that could cost more than 1MM Americans their jobs, and the FED will pivot to cutting borrowing costs in 2024. Many, including me, believe the FED will raise the benchmark rate by 50bps in December and 25bp in January, and perhaps the following meeting in 2023. I expect to continue to see the CPI numbers fall, which should add fuel to the rally we are experiencing now.
- Goldman indicated yesterday they expect a significant easing of US inflation in 2023, reflecting softening supply chain problems, a peak in shelter inflation, and slower wage growth. The company expects the core PCE measure to decline to 2.9% by December 2023 from 5.10% currently. Goldman and other firms are "aligned" with this thought. I suspect more firms will indicate this same trajectory over the next several months.
- FED Governor Chris Waller indicated, "we have a way to go" before the US Central bank stops raising rates despite good news on consumer prices. Waller cautioned that officials are not close to a pause and could continue to move rates up 75bps; however, many other officials have indicated they could moderate to 50bps. I suspect we will see 50bps in December and another 50-25bps in January. However, with the numbers last week regarding CPI, we will see overall moves slow down in the 1st Q of 2023, bringing our markets back to some stability.
- Investors in equities and FI should not get short-sighted; however, numbers are coming down, yields overall were market down ~17bps, including Friday, and bonds are scarce due to the average supply. This might not be the bottom; however, as we have been discussing, we could be very close.
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