Muni-Market Bulletin

The U.S. economy is now enjoying its longest economic expansion in history. As of July 2019, the United States surpassed its previous expansion period record of ten years which occurred from 1991 to 2001. This is remarkable considering an average economic expansion cycle lasts roughly four to five years. Like Independence Day, that is truly worth celebrating! However, many are now pondering the question, “how much gas is left in the expansion tank?”

Although U.S. economic expansion continues, the actual rate of growth is declining. Second quarter Gross Domestic Product is projected to decrease roughly 50% from the first quarter GDP increase of 3.1%. This type of decline in growth usually produces a more volatile market with increased fears of the economic expansion coming to an end. In response to these recent trends, the Federal Reserve recently re-emphasized that their primary objective is to support economic growth especially in the near term. In order to achieve this when growth is on the decline, the Federal Reserve will typically start adjusting their monetary policy by cutting interest rates. Changing monetary policy is much harder when the Fed is trying to spur growth rather than adjusting policy to limit growth. Although market analysts are currently divided on exactly what the Fed should do next, the bond and equity markets have already priced in multiple interest rate cuts from the Fed between now and the end of the year. The 10-year Treasury rate declined to 1.96% on July 3, 2019, which is the first time it’s fallen below 2.00% since November 8, 2016. The general consensus is that interest rates will remain low for the foreseeable future.

Even though the U.S. is experiencing a decline in economic growth, we are still well positioned compared to many other countries around the globe. However, we are mindful the outlook could deteriorate if the U.S. can’t resolve its trading disputes with some of our major trade partners, especially China. Federal Reserve Chairman Jerome Powell commented on this topic recently stating, “The global risk picture has changed, really just in the last six to eight weeks. And it’s around trade developments and concerns about global growth.” For over a year now, the U.S. and China have been attempting to work out trade differences with no resolution yet in hand. Many U.S. company profits have already been squeezed by the retaliatory tariffs, causing them to downgrade their future earnings forecasts. It’s difficult to gauge when or if these trade wars will get resolved, but it’s clear the Trump administration is highly motivated to work out these trade agreements prior to the 2020 Presidential election.

On July 5th, the U.S. employment report for June was released, reflecting a much stronger labor market than what was initially anticipated. The labor report helps support the case that our economy is slowing down but certainly is not sinking. Instead of the aforementioned forecast of multiple interest rate cuts through the end of the year, many now believe the Fed will most likely cut rates only once in the last half of 2019. In any event, it appears the Fed will continue to be patient in adjusting their monetary policy and won’t make any significant moves unless there is consistent data to justify any changes.

Click here to read the entire 2019 Q3 MMB

Article provided by Zac Saldi
Government Capital Corporation

Over the past quarter, the Federal Reserve has turned a complete 180 degrees on their monetary policy and plans for future interest rates. You may recall, on December 19th last year, the Fed raised interest rates for the ninth time since 2015 and also penciled in two to three more anticipated rate increases for 2019. This move by the Fed was largely questioned by many economists who thought the Fed was being overly optimistic about U.S. economic growth and underestimating the effects of various global economic uncertainties. In December, the S&P 500 dropped over 10% and the ten-year U. S. Treasury note started this year 68 basis points lower than in early November. This sharp decline in the U.S. equity markets prompted the Fed to release a subsequent statement well before their next regularly scheduled policy meeting, stating that they plan to be patient on any future interest rate increases. This news apparently provided a temporary fix for the stock market as the U.S. equity markets rebounded nicely in the first quarter of 2019, erasing the December losses.

In the most recent Fed meeting held in March, the Fed seemed to convey a much more dovish economic outlook and transparency in their monetary policy moving forward. Chairman Jerome Powell stated their adjusted outlook contains zero interest rate increases for 2019 and one rate increase in late 2020. Moreover, over two thirds of Fed officials indicated they don’t see a rate increase in 2020. This new outlook suggests interest rates will stay low for the near future in an effort to help boost the economy. Other key takeaways from the Fed’s recent March meeting included: a) their plan to keep shrinking the Fed’s balance sheet through the end of September, and b) their downgraded forecasts of U.S. GDP and inflation.

With this backdrop, many market participants believe that a recession could occur within the next two years even if the Fed does everything perfectly. In March, the U.S. Treasury yield curve inverted for the first time since 2007, meaning investors can earn a higher yield investing in a one-year Treasury than they could with a ten-year Treasury. A yield curve inversion has historically been seen as an early indicator of a recession looming. The drastic fall in longer-term U.S. Treasury yields can be partially attributed to other large economies such as Europe where ten-year bond yields are currently providing negative returns. Amazingly, this means for example, if you purchase a ten-year German bond, you will receive less in ten years when it matures than what you originally invested. This helps explain why many global investors are buying as many U.S. Treasuries as possible.

The U.S. economy is still growing but at a much slower pace than anticipated mainly due to the global weaknesses outside the U.S. The negative yields in Europe coupled with Britain’s chaotic effort to leave the European Union (Brexit) have caused economists to downgrade their economic outlook. The momentum of a great trade deal with the U.S. and China is slowly fading away with less optimism of any deal being negotiated that satisfies both parties. Suffice it to say, the economic impact of this trade deal will be significant for both economies.

In summary, the recent reduction in interest rates and softened economic outlook from the Federal Reserve will enable lower borrowing costs in most markets. With interest rates currently at fifteen month lows, municipal issuances are projected to increase for the foreseeable future.

Click here to read the entire 2019 Q2 MMB

Article provided by Zac Saldi
Government Capital Corporation

There is a common saying in sports, that “winning solves all problems”. However, when losses start to accumulate, what’s been overshadowed for so long comes under scrutiny. During 2018, the U.S. experienced GDP growth peaking at 4.2%, unemployment declined to a 49-year low, oil prices hit a 4-year high, the 10-year Treasury was up as high as 3.24% along with overall increases in consumer spending and corporate profits. So, why did 2018 end with so much economic uncertainty and volatility in the debt and equity markets? With almost all those positive trends now in the rear view mirror, many are voicing opinions on what or who is to blame for the volatile fourth quarter.

Looking forward, several factors are in play that will continue to impact financial markets:

China, in fact does matter. Many U.S. businesses rely on Chinese production and buy products from China and the new tariffs have caused many U.S. companies to downgrade their 2019 earnings forecast.

The flattening of the yield curve should not be overlooked. The difference between the 10-year Treasury and the 2-year Treasury fell to 11 basis points twice in December, which is the closest margin since June of 2007 where the U.S. experience a brief yield curve inversion. This is concerning considering all recessions dating back to 1975 have been preceded by an inverted yield curve where the 2-year Treasury rate surpassed the 10-year Treasury rate. Each of those recessions occurred within 18 months of the yield curve inverting.

Economic growth from the corporate tax cuts are beginning to fade. With stock buybacks reaching a record high of more than $1 trillion, some economists are questioning whether the tax cuts were actually a good economic spending stimulus.

Global weakness outside the U.S. is causing concerns. More than 75% of global economies are in bear markets and have experienced economic downturns. China’s economy which is the second biggest economy in the world is one of many economies that are suffering.

Given all the recent uncertainty and factors above, everyone is wondering if and how the Federal Reserve will act in 2019 to mitigate any further market volatility. In December, the Federal Reserve announced their ninth interest rate increase since December of 2015 and even went further, penciling in two more possible rate increases for 2019. However, the much bigger headline was the Fed revised their growth forecasts downward. Many economists believe the Fed overestimated the sustained economic impact of the corporate tax cuts and underestimated the impact of the trade war with China. Additionally, many major investment firms have already priced out some of the rate increases the Fed had penciled in for 2019. Based on the December 2019 Fed Funds futures contracts, the market is placing a higher probability of a rate reduction versus another rate hike in 2019. Just as this article was going to press, Chairman Jerome Powell confirmed the Federal Reserve will be more patient in considering any further interest rate increases. Additionally, in a further effort to assuage investors, he announced they will hold press conferences after every monthly monetary policy meeting beginning this year.

Overall the U.S. had a good 2018 and is still the largest economy in the world. However, that doesn’t mean we can ignore certain warning signs that may come to fruition moving forward.

Click here to read the entire 2019 Q1 MMB

Article provided by Zac Saldi
Government Capital Corporation

*Photo by Jake weirick on Unsplash