HJ Sims Market Commentary: The Path to And from Jackson Hole

by Gayl Mileszko

The older we grow, the more we realize how little we know. Overwhelmed by the universe of data and news at our fingertips, some of us cling to trivial facts: New Jersey grows two thirds of all the eggplant in the world. Mississippi produces the most NFL players per capita. We are more likely to win an Olympic Gold medal than the Mega Millions lottery, and twice as likely to be killed by a vending machine than a shark. Others who think that they know and have seen it all – infectious disease doctors, street-wizened police detectives, storm-chasers, patent engineers and battle-scarred veterans – should know better. They get surprised time and time again by Mother Nature and our fellow human beings and the things they both are capable of. There is a village in Norway named Hell which does in fact freeze over in frequent sub-arctic temperatures. And, in the United States, a small unelected group of men and women trusted to know best how to maximize employment and price stability have been intervening in the economy for fifteen years in unprecedented ways by creating astonishing sums of money — $8.9 trillion — to buy assets, manipulate market prices, prop up faltering private companies and control rates of borrowing, with almost none of the contentious debate that accompanies all the other issues of the day.

Waiting on the Next Fed Move

The Federal Reserve Bank does not meet again to decide on its next course of policy until September 20, but the members are not far from our thoughts every day as we battle inflation and gyrating markets. This week, the minutes of the last Open Market Committee meeting will be dissected and four officials will deliver cryptic remarks to various professional and civic groups. Details on the Jackson Hole Economic Policy Symposium “Reassessing Constraints on the Economy and Policy” are being released ahead of the August 25-27 gathering. More than a hundred bankers, financiers, economists, academics and government officials gather there every year to discuss “policy issues of mutual concern” of which there are many this year once again. Futures traders focused on the direction of interest rates after the summit are split on the size of the next move: 49.5% see a hike of 50 basis points, the other 50.5% bet it will be 75 basis points. The Fed already made history in July by raising rates by three quarters of a point twice in a row in an effort to slow the economy and tackle the sky-high inflation caused by its own overstimulation exacerbated further by the $5+ trillion in fiscal stimulus packages from Congress, the most recent of which was just signed into law yesterday.

Split Sentiment

Consumer sentiment ticked up slightly this month but still hovers near record lows dating back to 1952. Bond and stock markets appear to have different takes on the direction of the economy with bond traders shaking their heads in disbelief at the rallies underway in equities. Stocks are on track for a fifth straight winning week on expectations that the worst of inflation is over and the Fed may only hike by 50 basis points. As of the close on Monday, the Dow is up 3.2% on the month, the S&P is 4% higher, the Nasdaq has gained 6% and the Russell 2000 is up 7.2%. Oil prices are down 9.3% to $89.41, gold has gained one percent and Bitcoin prices are up 1.7%.

Treasury Yield Curve Still Flashing Signs of Recession Risk

Bond markets are askew, representing more pessimism over the economy and demonstrating the kind of volatility more commonly seen on the Big Board. Ten trading days into the month, investment grade munis and corporates are down for the first time since June. Only high yield munis and corporates are showing slight gains. Treasury index returns are down 1.31%, and key parts of the yield curve have been inverted since July 5. Although the economist’s preferred indicator of future recession (the gap between the 3-month and 10-year Treasury yields) is not yet in the warning zone with 20 basis points still separating them, the 2-year, 10-year and 30-year yields are out of whack. At this writing, the 2-year yield stands at 3.35%, the 10-year at 2.90% and the 30-year at 3.15%.

A Rare Municipal Yield Curve Inversion

On the tax-exempt side, SIFMA 7-day rate (Municipal Swap Index) rose to 1.83% last Wednesday, up from 0.65% on July 20. Short muni bond maturities are also inverted for only the tenth time in the past 41 years according to MMD. The 1-year AAA general obligation benchmark at 1.97% has a higher yield than the 5-year bond at 1.90%. The 10-year at 2.24% and 30-year at 2.93% are both up more than 3 basis points this month, while the 2-year has climbed 21 basis points.

Market Movers This Week

This week’s primary markets are driven in part by economic data releases on housing starts and home sales as well retail sales and corporate earnings from retail giants Walmart and Target. There are seven Treasury auctions and plenty of attention is directed toward primary election outcomes in Alaska and Wyoming. The $12 billion muni calendar features the largest ESG deal the market has seen so far, a $2.7 billion taxable Massachusetts Unemployment Trust Fund Social Bond issue. And the Equitable School Revolving Fund is bringing a $232.8 million social bond deal through issuers in Arizona and California to finance about 58 charter school loans in 19 states. Last week, James Irwin charter schools in Colorado Springs brought a $25.5 million BBB rated financing structure with 40-year term bonds priced at 5.00% to yield 4.7%. We also saw the first publicly offered senior living transaction in many weeks. The City of Sartell, Minnesota sold $10.7 million of non-rated refunding bonds for Country Manor Campus that included term bonds in 2035 priced at par to yield 5.00%

HJ Sims in the Market

HJ Sims is in the market this week with a $21.4 million non-rated financing for Shining Rock Classical Academy in Waynesville, North Carolina, a K-10 charter school. Bonds are being issued through the Public Finance Authority in Wisconsin and are available for purchase by qualified institutional buyers and accredited investors. For further information on this, and other investment opportunities, please contact your HJ Sims representative.

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

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