HJ Sims Market Commentary: Change for a Dollar

by Gayl Mileszko

Americans carry an average of 4.73 credit cards and 59% of us prefer using them, or our debit cards, when we make purchases. We consider them easier, safer and more hygienic than using bills and coins, but we sometimes go a bit overboard. In the case of credit cards, it is said that their use anesthetizes us against the pain of payment. Perhaps that is why our average credit card debt is $5,221. That level is rising alongside inflation and Fed rate hikes; credit card balances reached $841 billion in the first quarter of this year, and average credit card interest rates have now topped 20 percent.

Counting Pennies

29 percent of us still favor the use of cash, but only 16 percent of us always carry bills and coins on our person. The amount of cash in circulation here is about $2.17 trillion, a sum that increases every year although it is used in only 19 percent of all reported transactions. Yet while we all count our proverbial pennies; an increasing number of Americans no longer use physical cash at all. This move to a digital life may be contributing, among other things, to an overall decline in our basic math skills. Many of us are able to use our phones to make payments, see account balances, calculate taxes and tips on the spot, and perform so many other functions without taxing our brains. It was once a real test of smarts to figure all the 293 possible ways to make change for a dollar.

Dollar High

The U.S. dollar has been soaring. Its value against all other currencies is the strongest in at least 20 years. The greenback is reportedly on one side of 90 percent of all foreign exchange transactions, recently accounting for as much $6 trillion of daily activity. Historically, of course, the dollar rises in times of turmoil, worries over growth, and inflation. This time, investors around the world see that the Fed is the only central bank moving aggressively, raising rates to levels that look very attractive to foreign investors battling high prices. At this writing, however, the dollar is retreating a bit and the euro strengthening ahead of this week’s European Central Bank meeting.

Bear-ly Any Returns

U.S crude oil futures trading on the New York Mercantile Exchange have gained nearly 30% year-to-date at this writing, rising from $75.21 at the start of the year to $97.59. But, more than halfway through the year, indices for almost every asset class are deep in the red, reflecting losses across the board. At the close on Friday, Bitcoin has lost 56%, the Nasdaq is down 26.8%, silver prices have fallen 19.7%, gold is 6.6% lower. Even U.S. Treasuries, the world’s safe haven, are down 9.1%. One benchmark index for investment grade corporate bonds is down 13.4%, the one for investment grade munis is down 7.9%. High yield corporate bond returns are negative 12.4%, high yield munis have lost 8.11%. Among the more popular funds, the Vanguard S&P 500 ETF (VOO) is down 18.98%, the iShares Core U.S. Aggregate Bond ETF (AGG) has lost 9.78%

Recession Talk

According to just one of many surveys, 70% of Americans believe that an economic downturn is on its way. Fifty eight percent of us think the country is already in a recession. An official declaration of a recession in the United States would be made by the Business Cycle Dating Committee of the National Bureau of Economics, a private, nonprofit, nonpartisan organization that does not even admit they have gathered unless they release a formal decision. Such decisions are typically made many months after the cycle has ended. Factors include a significant decline in economic activity spread across the economy lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. The average recession lasted 21.6 months and we have gone through four in the past 30 years, most recently in early 2020. Predicting the timing and severity of a recession is all but impossible, but the chatter begins when warning signs appear with major declines in indicators such as consumer confidence, employment, and manufacturing. The talk intensifies when the yield curve inverts as it has this month.

Curve Brawl

The yield curve is a graph depicting the market value of U.S. Treasuries with terms of three months to thirty years. In a healthy economy with stable market conditions, the market value or yield will be higher for government bonds having longer maturities. But when short-term yields jump higher than their long maturity counterparts, investors are signaling their fear of recession. Inverted yield curves, where the 3-month or 2-year yields exceed those of the 10-year, have preceded past recessions. This past week, as we watched the $23 trillion Treasury market and digested the latest surge in the consumer price index, we found some inversions not seen in 20 years. At this writing, the 3-month bill yields 2.53%, the 2-year note stands at 3.18%, the 10-year note at 2.99%, the 20-year bond at 3.40%, and the 30-year bond at 3.16%. The 20-year Treasury was reintroduced in May of 2020 and its lack of popularity and relative lack of liquidity have produced significant price swings; its yield has been out of sync since late last October when it first rose above the 30-year. But the rest of the yield curve just began to invert this month. The 2-year yield, which is extremely sensitive to short-term rate expectations, has been above that of the 10-year since July 5, and it has exceeded even that of the 30-year since July 13.

Prime Time to Contact Your HJ Sims Representative

At HJ Sims, our veteran analysts, bankers, traders and sales professionals and financial advisors await no official determinations of recession or recovery. We are hands-on and active in every market cycle as we track key economic and industry data and trends, fund flows, offers, bids-wanted, trading volumes, new issue calendars and sale results. We believe that our clients benefit from our 87 years of insight on market conditions, our expertise in public finance, and our experience as underwriters, financial advisers and bond and stock brokers. Our traders scour the market for undervalued higher yielding tax-exempt and taxable municipal bonds and corporate bonds that outperform benchmark indices. Whether you are hard at work or enjoying your summer vacation, we invite you take a half hour this week to speak with your HJ Sims representative. We look forward to a conversation that will challenge and inspire you, and help to benefit your family and your business in the days and markets ahead. If you feel limited in your investment options due to recession fears, lack of product knowledge, portfolio size, or other factor, we can help to energize your thinking. Inasmuch as there are 293 possible ways to make change for a dollar, we look forward to working with you to find new ways to boost your portfolio and meet your investment goals.

Markets This Week

Fed officials are muzzled – in a blackout period – ahead of the Open Market Committee meeting next Tuesday and Wednesday. This quiet time, without crosstalk about possible future policy actions, produces a bit of a market pause giving traders a chance to focus on second quarter corporate earnings and form inflation expectations for the rest of 2022. There are six Treasury auctions this week and several key data releases including the Conference Board Leading Index, existing home sales and housing starts. The European Central Bank meets on Thursday and is expected to raise its rate by 25 to 50 basis points. The interest rate on its main refinancing operations, marginal lending facility and deposit facility stand at 0.00%, 0.25% and -0.50% respectively.

The Muni Calendar

The municipal bond calendar, which may reach $8 billion this week, features 65 negotiated financings and is dominated by high grade offerings. In the high yield market, no senior living transactions are scheduled but several charter school deals are planned, including an $11 million non-rated refunding for the Pennsylvania STEAM Academy Charter School, and a $22.5 million non-rated issue for IDEA Jacksonville IV in Florida. The Colorado Educational and Cultural Facilities Authority also has a refunding and improvement bond issue for Eagle Ridge Academy in Brighton, rated A+ under the state’s charter school moral obligation program. The 30-day forward calendar only totals $11 billion while redemptions and maturities are expected to exceed $25 billion. The heavy stream of cash available for reinvestment buoys the tax-exempt market, mostly insulating it from the day-to-day volatility in the Treasury and stock markets. The cycle of mutual fund outflows mercifully reversed last week; so far in 2022, muni funds have been hit with the largest net redemptions of any full year dating back to 1992 flows were first tracked, $88.1 billion. The latest weekly flow data will be published late on Thursday.

For more information on offerings or questions about current market conditions, please contact your HJ Sims representative.

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