- The rate hold yesterday was widely expected, and the FED acknowledged the tightening cycle's end. The FED is sending strong signals the tightening cycle is over, and the post-meeting comments indicated very little pushback against the idea of imminent rate cuts. The new plot sees downward revisions to the FED Funds Rate path, with 2024 at 4.60% vs. prior 5.10% and 2025 at 3.60% vs prior 3.9%. The officials have kept their unemployment forecast, expecting it to peak at 4.10% in 2024. More surprisingly, they also revised up the natural rate of unemployment to 4.10% from 4%. The key takeaway from Powell was that the first cut would be before the inflation rate hits 2%; waiting until inflation hits his target rate will be "too late.” The FED showed a willingness to endorse market pricing of rate cuts.
- Fitch reported that economic growth will cool in 2024, but overall macro conditions will remain neutral for US states and governments. Strong reserves, liability reductions, and other prudent management measures leave state and local governments well-positioned. As we have been discussing, quality bonds do not have a credit problem; the issues have all been rate-related. Fitch also mentioned that they expect employment, income, and GDP to slow, but the US would avoid an outright recession.
- MUNI funds are still selling, and those funds are moving into individual MUNI bonds. This point explains part of the rally we experienced. I suspect there is tax selling in mutual funds and buying in individual bonds. We continue to see individual CUSIPs bought as the street is a net buyer and has been for a few weeks.
- As we have discussed, supply is low, and after last week’s "bump up" with those bonds out of the market, I suspect we will have a low supply for the balance of the year and the first two weeks of January. Today, supply sits at 4.60B as the markets prepare to wind down for the year, which will hold rates steady.
- PPI was 0.00% on 12/13, which was expected by the street. PPI’s final demand came in at .9%, down from 1.2%, which should help the markets. The bottom line is that the numbers continue to stay weak.
- History tells us should the economy move into a recession; the FED typically acknowledges this about five months after it started. Even then, discussions about whether the economy is in a recession often lack decisiveness, with members spending several more months debating whether to drop rates. I suspect it will be late Spring when the FED recognizes this.
- If we are in a recession (some think it started in October), it will be in February or March that the FED will begin to discuss. They will ponder around, then finally cut in the summer.
The bottom line is that yields are lower and steady as we write this. Overall supply is slim and will remain slim until the 2nd week of January. There will be large cash balances from coupons and maturing bonds in the market in January, maintaining solid buying interest. The FED remains dovish/neutral. We are locking in yields here, and no one can say this is the “right time," but the market feels stable with the recent economic news.
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