The January Effect Continues

WEEK ENDING 1/19/2024

• Year-end wishful thinking dissolves, and it’s about time.
• Probabilities fade for significant March rate cuts.
• The voters of Iowa have spoken.

A CITY DIFFERENT TAKE

As we finish up the third week of the new year, more realistic views of potential rate moves are coming into focus. Recent economic releases show that the economy is moving along at a reasonable pace and jobs are plentiful despite recently announced tech job cuts.

Most of the data releases beat estimates. Retail sales were 0.6% compared to 0.4%. University of Michigan consumer sentiment came in at 78.8 versus 70.1. And topping them all, initial jobless claims were 187,000 versus 70,100.

Couple these releases with statements from some Federal Reserve governors that chilled future rate-cut expectations and, as of January 19, the market-implied probability of a 50 bps move in the Fed Funds rate is now 46.5%. Compare that to an 85.3% probability of a 100 bps move by March (reported on December 20).

President Biden signed a short-term funding extension (the same responsible kind of thing that lost Kevin McCarthy his job).

“In a rare event, lawmakers had been confronting not one but two government shutdown deadlines on January 19 and February 2. The short-term funding extension sets up two new funding deadlines on March 1 and March 8.”  

Not quite the Ides of March, but close.

The Middle East is a hotbed of unrest and the shipping channels in the Red Sea are not safe, forcing much of the world trade goods to take a longer and much more expensive route to market. This could be a factor influencing future inflation.

CHANGES IN RATES

Treasury market yields moved higher in the shortened holiday week.

The municipal market followed the Treasury market higher in yield. Except for the 30-year maturity, most maturities are still not attractive on a tax-adjusted basis versus their Treasury equivalents. The “January Effect” continues!

The municipal/Treasury ratios increased (municipal bonds became less expensive) during the week. They are still past breakeven rate versus their Treasury equivalents.

Corporate yields followed Treasuries higher last week.

THIS WEEK IN WASHINGTON

The voters of Iowa have spoken. On to New Hampshire. The former president’s momentum is very impressive. We will see if any convictions hurt the “Big Mo.”

As mentioned earlier, Congress has come up with another short-term spending plan to avert a government shutdown. Seems like the House of Representatives are more concerned with giving the president a “win” than effectively managing border security or aid to Ukraine and Israel.

On the national security front, Hunter Biden agreed to be deposed in the impeachment inquiry.

“Speaking with reporters later Thursday, Comer said, "He's going to be able to come in now and sit down and answer questions in a substantive, orderly manner."

In summary, the political “clown show” is in full swing as the new year begins. We feel so secure knowing that our national interests are so well protected. Will Rogers once said, “Democrats take the whole thing as a joke. Republicans take it serious but run it like a joke.” Now there was a wise man!

WHAT, ME WORRY ABOUT INFLATION?

The 5-year Breakeven Inflation Rate finished the week of January 19 at 2.38%, six basis points higher than the January 12 close of 2.32%. The 10-year Breakeven Inflation Rate finished the week at 2.34%, seven basis points higher than the close of January 12.

MUNICIPAL CREDIT

10-year quality spreads (AAA vs. BBB) as of January 19 were 1.24%, three basis points higher than the January 12 reading of 1.21% (based on our calculations). The long-term average is 1.71%.

Quality spreads in the taxable market are not attractive but were unchanged (kind of), ending the week at 0.75%, two basis points lower than last week. High-yield quality spreads were 3.16% on January 19.

WHERE ARE FIXED-INCOME INVESTORS PUTTING THEIR CASH?

Money Market Flows (millions of dollars)

Money market funds flows reversed last week for all categories other than Prime.

Mutual Fund Flows (millions of dollars)

Winner, winner chicken dinner — municipal cash flows led the way. More evidence of the “January Effect.”

ETF Fund Flows (millions of dollars)

SUPPLY OF NEW ISSUE MUNICIPAL BONDS

Supply for municipal tax-exempt calendar will likely remain uneven for the next few weeks at the start of the new year. This week’s municipal tax-exempt calendar estimates are $7.8 billion in new issuance.

CONCLUSION

Economic indicators suggest a reasonable pace of growth and job availability, with data releases surpassing estimates. Federal Reserve governors' statements have tempered rate-cut expectations, leading to a 46.5% probability of a 50 bps move in the Fed Funds rate. Meanwhile, the "January Effect" continues. 

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