Muni-Market Bulletin

Over the past quarter, the United States economy has shown much needed improvement each month as we further distance ourselves from the national lockdown which took place back in April.  The gradual economic re-opening coupled with historic fiscal and monetary support has paved the way for our economy to move forward after enduring a major blow when the economy was essentially turned off.  Fortunately, the American work force is resilient and is one of the major backbones of this Country.  Since the lockdown, consumers and businesses have quickly adapted by utilizing new technologies and remote working protocols.  In the process, many companies have developed new strategies which they will leverage even after our country triumphs over the pandemic.

Recent economic data shows improvements in multiple major sectors which endured a substantial blow following the national lockdown measures.  Unemployment peaked in April to 14.7% which has since declined each month to its current rate of 7.9% as of the end of September according to the U.S. Bureau of Labor Statistics.  Retail Sales have been climbing in recent months and are currently 2.2% higher than at this point last year.  The corresponding rebound in sales tax revenue together with a growing economy is expected to provide much needed help for state and local governments whose budgets have been under pressure this year.  In August, pending home sales outperformed projections by more than double and posted its highest monthly increase since 2006.  Most of these positive trends are expected to continue as the economy gradually opens back up.  However, the United States still has many major obstacles to navigate through to get our economy back to where it was before the coronavirus pandemic.

In mid-September, the Federal Reserve announced it would continue to keep interest rates at historical lows for the foreseeable future unless inflation sustainably exceeds their 2% target.  In an attempt to support the U.S. economy, this year the Fed has purchased more than $1 trillion in agency mortgage-backed securities and over $3 trillion in U.S. Treasuries.  These quantitative easing measures which increase the nation’s money supply will continue in the coming months.  The Fed also announced it intends to continue purchasing $120 billion per month in U.S. Treasuries and agency mortgage-backed securities.  As the economy continues to improve, the Fed should be able to gradually decrease their quantitative easing measures.  Hopefully this occurs sooner rather than later as the United States outstanding debt, now totaling almost $27 trillion, will burden the American taxpayers for many decades to come.

Municipal debt issuances have continued to surge over the past four months spurred by low interest rates and a very favorable funding landscape provided by the Fed.  September’s municipal issuances increased over 26% compared to September 2019 and represents the highest September issuance volume since the mid 1980’s.  Many experts are anticipating another record setting month of issuances in October as municipalities want to utilize the current low interest rates to fund projects for their constituents and refinance existing debt at lower borrowing costs.

This year hasn’t been easy to say the least and will be a year talked about for centuries.  Americans have been tested over and over throughout history.  At this moment in our history, it’s important to remember, true character is revealed by actions taken when faced with adversity.  John F. Kennedy once said it this way, “There are risks and costs to action.  But they are far less than the long range risks of comfortable inaction”.

Article provided by Zac Saldi
Government Capital Corporation

It’s difficult to believe we are only halfway through 2020 given everything the U.S. economy and our citizens have already endured. Many books will be written in the future about all the unprecedented events which occurred during 2020.

Economists currently estimate the U.S. economy will shrink roughly 4.5% this year. Unemployment is hovering around 11% and is expected to fall to 9% by the end of the year. The stock market has recently rebounded from its lows in mid-March as the unexpected job gains over the past two months have provided some optimism that our economy is recovering as more businesses continue to gradually open back up. Many economists are forecasting a more robust nearterm growth pattern as the various stimulus plans have been effective in saving many jobs which were quickly fading away once the shutdown began. Looking further out into the future, the 2021 forecast appears more moderate, with a slower and more sustainable growth pattern. The Fed has repeatedly stated the U.S. economic outlook remains uncertain and a full economic recovery hinges on the battle to control the spread of COVID-19.

Interest rates have remained near all-time lows over the past few months and aren’t expected to increase anytime soon. If the economy shows more improvement we may see interest rates tick up some, but the Federal Reserve has made it clear that their goal is to keep rates low until late 2021 or early 2022. In addition to the Federal Reserve cutting interest rates this year, the Central Bank has pumped trillions of dollars into the economy in order to keep credit flowing to businesses, municipalities, and households. The influx of money was in part triggered by the liquidity crisis in the municipal bond market which occurred back in March when investors moved to safer, more liquid assets as a result of increased coronavirus concerns.

The Municipal sector is currently facing economic headwinds and their revenue declines are constraining many budgets on the state and local levels. Municipal debt issuances have recently rebounded with the resurgence of both refinancings and new money issuances. Refinancings are up over 65% through the first half of the year and more than doubled in the month of June alone. New money municipal debt issuances are up 16% this year, which is the highest increase since 2016. This trend is expected to continue as rates will continue to stay low for the foreseeable future. Budgets for many of the nation’s state and local municipalities will continue to be under a large microscope as they try to recover from the pandemic-induced revenue shortfalls.

In summary, 2020 has been rough for many Americans and unfortunately, the disruptions and anxiety may not diminish soon. Political and economic developments are expected to continue clouding the longer-term outlook of the United States and rest of the globe. In difficult times it’s important for everyone to remember, adversity not only builds character, it reveals it.

Click here to read the entire 2020 Q3 MMB

Article provided by Zac Saldi
Government Capital Corporation

The year 2019 ended up being a very good year for the U.S. economy.  In a year which included major international trade disputes and a weak global economy, American consumers demonstrated exceptional resilience and versatility.  As a result, the S&P 500 and Nasdaq surged roughly 30% for the year which are the largest annual increases in those indexes since 2013.  The U.S. labor market remained strong throughout the year with unemployment hitting a 50 year low of 3.5%, and a strong increase in new jobs at year-end, well exceeding analysts’ expectations.  The strong labor market has increased worker wages roughly 3% this year which is one of the largest annual increases over the past decade.  This has helped keep consumer spending at a robust level, helping to offset the recent trends of lower business investment, weaker exports and a contracting manufacturing sector abroad.

The Federal Reserve lowered interest rates three times last year in order to mitigate some risks posed by slowing global growth and international trade uncertainty.  December’s Federal Reserve Policy meeting minutes indicated most Fed officials don’t project any adjustments to the current monetary policy, which is to keep interest rates at their current levels.  Not one of the 17 officials currently envision any interest rate cuts in 2020 and only four project a potential rate increase by the end of the year.  The Fed indicated inflation will be one of their main areas of focus this year.  Inflation has been hovering around 1.6%, slightly below their 2% target.  The Fed has already been acting on the softer inflation rate by pumping money into the market thereby providing temporary liquidity.  Recently, the Fed has been buying roughly $60 billion of Treasury bills every month to help keep the economy’s momentum going.

This time last year, the Fed was under fire after they increased interest rates again in early December.  Their action essentially sidelined many market participants causing the domestic stock market to decrease roughly 20% in less than one month.  However, market participants were much more satisfied with the Fed’s actions (including three interest rate cuts) in 2019.  Municipal debt issuances exploded in the fourth quarter of 2019, increasing 55% compared to the fourth quarter of 2018. Annual municipal debt issuances increased from $346 Billion in 2018 to $423 Billion in 2019, a healthy 22% boost.  Many fixed income strategists believe this trend will continue in this current low interest rate environment and projections for 2020 debt issuances range from $400 Billion to $450 Billion.

Our economy’s robust growth is projected to moderate in 2020 as there are still concerns and headwinds facing the U.S. and rest of the world.  It’s increasingly difficult to project how the economy will perform, considering this is an election year where markets and business sentiment tend to be more volatile.  However, the general consensus is that interest rates should stay near their historical lows for the foreseeable future.

Click here to read the entire 2020 Q1 MMB

Article provided by Zac Saldi
Government Capital Corporation

It’s difficult to believe that three fourths of 2019 is already over. As we head into the final quarter of the year, the global market is experiencing more volatility than we’ve seen in recent history. At the beginning of the year, the Federal Reserve indicated that interest rates were heading more towards a higher neutral rate. Three quarters later and over 100 basis points lower on the 10-Year Treasury rate, the federal reserve has adjusted their monetary policy to help spur growth in reaction to declining economic trends.

In September, the Federal Reserve lowered interest rates 25 basis points for the second time this year. The two interest rate cuts this year were aimed to provide some insurance against rising risks from trade uncertainty and slowing global growth. Federal Reserve Open Market Committee Chairman Jerome Powell is facing new pressure to declare a third straight interest rate reduction in response to weakening economic data and volatile financial markets. The Federal funds futures market has now placed a 76% probability on the Fed lowering rates at their next Open Market Committee meeting, which is in late October. However, much of the Fed’s adjustment in its monetary policy have been muted by growing economic pressures. The recent lag in economic data also has investors being more cautious as our record long expansion cycle continues to lose ground.

On a macro, worldwide level, the effects of the United States’ 15-month trade battle are piling up fast.  With all of the recently enacted tariffs and the higher value of the U.S. dollar compared to other currencies, it’s becoming much harder for U.S. companies to remain competitive in trade across the globe.  As evidence, the most recent U.S. manufacturing index contracted for the second month in a row and is now creeping along at the slowest pace in over a decade.  This decline causes company profits to shrink and restricts future growth in many sectors of the economy.  Company layoff announcements have increased year over year and we’ve witnessed declines in the U.S. services sector, which employs roughly 70% of Americans.  Slower job growth typically decreases consumer spending which accounts for more than two thirds of the United States Gross Domestic Product.

With this backdrop, municipal debt issuances spiked in Q3 as municipal issuers were eager to take advantage of the recent decline in interest rates.  The month of September experienced one of the highest volume of municipal debt issuances over the past decade.  With interest rates expected to stay low for a while, the trend of increased issuance volume is expected to stay high in Q4.

Click here to read the entire 2019 Q4 MMB

Article provided by Zac Saldi
Government Capital Corporation