By Gayl Mileszko
Market Commentary
Is the Price Right?
The current market consensus is that the impact of tariffs on inflation is likely to be “minor,” but the average price of a pound of ground roast coffee is $8.87, up 40% in the past 12 months. And what used to weigh in at 16 ounces at the grocery store is now down to 12 or 8 ounces. Most of the coffee we need for fuel in the morning comes from Brazil where tariffs were set at 50% in July. Also higher are homeowners’ insurance premiums, up 70% since 2019, reportedly due to higher risks of crime, floods, wildfires and hurricanes. And, as demand from AI-driven data centers rises at a record pace, electricity prices have jumped more than 30% over the past four years. Most of these price increases are hard to avoid. But they can be budget-busters and they are driving us crazy. And speaking of driving, the average price of a new car is now $48,907; to make it more affordable, auto loans are now being stretched out to 8 years, adding more than $3,300 in interest payments to the total cost. Note that major equity indices are seeing record highs this month but the VIX or Fear Index is just off the lows of the year, so markets do not appear to be worried about a bubble even though stocks are now trading on average at 30 times earnings.
Penny Pinched by AI
To offset higher fuel costs, airlines began charging $15 for checked bags back in 2008. Once they found a major new revenue source, they looked for more. That led to new upcharges for a few more inches of leg room, early boarding, snack packages, earphones, and lounges. At first, we loved having these options from which to pick and choose but no matter what we decided, it always seemed to cost us more than before the great unbundling. Business Insider recently published a piece about price tiering, price discrimination, and premiumization practices at Costco, Disney, and Uber. How we are lured with loyalty programs that generate a wealth of data about our buying habits. How we are constantly being offered a menu of bare bones-good-better-best-stunning alternatives. Face it, AI now has our income, age, history, and interests pegged perfectly. We are being hyper-targeted at a granular level with ads, tempted by premium versions of everything, made dizzy by dynamic pricing. It takes superhuman discipline these days to stick to a budget, scout good deals for what we need to buy, and feel good about it all — especially since our average attention span has been whittled down to 8.25 seconds.
Value Pricing
Of course, there are plenty of reasons to love unbundled services. Senior living campuses are finding demand from prospective residents for services and fees more closely tailored to their individual interests and budgets. Some life plan communities offer Type A and Type C entrance fee and rental options, others feature the ability to enroll in college classes, for example. Developers looking to meet the huge demand expected from middle income seniors are trying hard to structure an affordable product and attractive service package. Parents and taxpayers are looking for more PreK-12 educational choices, the opportunity to homeschool, select a trade or vocational school, language immersion charter school, or dual enrollment or private school program. Many commuters are happy to pay tolls with dynamic pricing in order to get to and from work more quickly. Frequent flyers receive valuable benefits if not critical features of perks that greatly facilitate the conduct of their business.
Bond Prices
Ahead of the highly anticipated Federal Open Market Committee meeting, press conference, and new dot plot release, the 2-year Treasury yield at 3.50% is down 11 basis points this month. The 10-year yield at 4.02% has rallied 20 basis points and the 30-year yield at 4.64% has fallen 28 basis points. Municipal bonds have outperformed their taxable counterpart so far in September. The 2-year AAA general obligation bond benchmark yield at 2.00% is down by 20 basis points. The 10-year at 2.86% has fallen 36 basis points. And the 30-year yield at 4.21% has rallied by 40 basis points. Everyone anticipated the first rate cut of 2025 on Wednesday, a 25 basis point reduction in the Fed Funds target rate, and futures trading projects another 50 basis points of reductions by year-end. This monetary policy action has already been incorporated into current market pricing, so anything other than this will cause a market disruption. A cut of 50 or more basis points would have thrilled the Trump Administration and many borrowers but could have rattled traders who would wonder if the Fed is seeing darker economic data than the rest of us. And it may have raised new questions about the independence of the central bank – whether the Trump Administration pressure and new appointments will politicize the agency more than some argue it already has been. Markets currently foresee more quarter point cuts next March, June and September.
The Price of Independence
Fed officials are juggling a lot right now. Their mission is to move the economy toward maximum employment and stable prices. But the President is trying to fire one member, Lisa Cook; so far, two courts allow her to remain on post while the case is appealed to the Supreme Court. The newest presidential appointee, on an unusual leave from his White House role as Chair of the Council of Economic Advisers, was just confirmed by the Senate for an unusual four-month term. Stephen Miran believes that the Fed has a third mandate: to pursue moderate long-term interest rates. None of the Fed bankers has been on board since the Great Recession, but many have been present for both easing and tightening cycles, and overseen massive interventions in the financial markets. To a great extent, investors around the world expect future interventions as necessary to fend off recession and protect profits. Irresponsible, expansionary fiscal policy, currency depreciation, and inflation whether leftover from pandemic stimulus, attributed to global conflicts or new tariffs policies, have made the Fed’s life quite tricky. Many question the reliability of the data on which the Fed has based its data-dependent rate decisions. But there seems to be a general consensus that the Fed must be perceived as being insulated from political influence, that inflation still remains too high, and that the labor market and consumer credit are weakening. Because Fed meetings are not televised – perhaps one day they will be on TikTok – Fed Watchers missed this week’s meeting drama. Who was trying to normalize rates, who pushed for bigger and more urgent moves, how many dissented at first, how much more worried were they about labor than inflation? Is Jay Powell still conducting the monetary symphony or has the baton effectively passed?
Market Prices
Gold prices are at all-time highs: $3,689 an ounce, up 10% in the last 30 days. Analysts attribute this to concerns over the true and future independence of the Fed, the massive global debt, worries over the ability of sovereigns – particularly the U.S. – to pay off this debt, the progress in international trade talks, the impact of any further Russian sanctions, and the terrifying prospect of the Ukraine and Middle East conflicts spreading. The U.S. approaches the end of the fiscal year and Congress debates an extension of current spending levels through November 21. As always, at this time of year, the threat of a federal government shutdown is present. The debt limit is not an immediate concern, as the reconciliation bill increased the cap to $41.2 trillion, or 136% of GDP. But the Trump Administration has already made major reductions in force and spending, and rescinded and redirected funds, so state and local governments and institutions around the world that the U.S. has supported are on tenterhooks, wondering about the impacts on their budgets and operations.
Market Movers
Investors will be reviewing routine economic data releases this week include retail sales, housing starts, building permits, and leading indicators. There are also eight Treasury auctions to monitor. Many, many investors took a wait-and-see approach; money market fund assets now exceed $7.3 trillion ahead of the big event of the week — the Fed meeting. Traders have an eye on events overseas where President Trump is on a state visit to the United Kingdom. And Members of Congress, other elected officials, and prominent spokespeople around the U.S. and indeed the world are on edge and beefing up security in the wake of the shocking assassination of Charlie Kirk and concerns over social media’s role in fueling political violence.
Municipal Bonds
Volume is at an all-time year-to-date high, over $400 billion, up 17% over last year. The muni market rally this month has finally brought year-to-date index returns into the black with higher institutional trading levels and more crossover activity. Taxable munis have performed well all year and are up 7%, beating Treasuries at +5.65% and high yield corporates at +6.88%. Investment grade tax-exempt munis are up 2.33% and non-rated munis are 1.44% higher, year-over-year. Best tax-exempt performers are in the 3-7 year maturity range, now up 4.88% in 2025. Lipper reports that $14.4 billion has flowed into municipal funds with half of the total directed to high yield strategies. Investors now have $960 billion invested in municipal bond mutual funds and exchange traded funds. Tax-exempt money market funds hold another $137.7 billion. A total of $30.4 billion of principal and interest is being paid out this month, available for reinvestment in a market that now exceeds $4.3 trillion, up $71 billion in the quarter ended June 30, with direct retail holdings higher by $32 billion and exchange traded funds up by $7.7 billion.
Recent Muni Pricings
Last week’s muni slate totaled $14 billion. Hamilton County, Ohio came to market with $88.3 million of BBB-minus rated bonds for Life Enriching Communities, featuring a 2055 final maturity that priced with a 5.50% coupon to yield 5.45%. The Ohio Housing Finance Agency sold $25.3 million of non-rated bonds for Ashford at the Enclave, featuring a 2045 maturity that priced at 6.50% to yield 6.45%. The Agency also brought a $26.6 million non-rated deal for Silver Birch of Cuyahoga Falls, a $22.5 million non-rated financing for Silver Birch of Amherst, and a $26.6 million non-rated transaction for Silver Birch of Canton that each included 20-year term bonds priced at par to yield 6.25%. The Public Finance Authority conduit sold $24 million of non-rated bonds for Cherokee Classical Academy in Canton, Georgia that was structured with a 40-year final maturity priced at par to yield 7.00%.
At HJ Sims, The Outcome is Income
We track market prices as closely as anyone in the business but, as an income-oriented firm, we focus on the steady demands presented by our valued institutional and individual customers for interest and dividend yields on long term core holdings. Reach out to your HJ Sims representative for more information on the attractive market rates available to borrowers and the tremendous tax-exempt and taxable yields available to investors today.