Municipal Strategy Report

Municipal Strategy Report A Monthly Analytical Services Division Publication July 2018 Consumer Providing Steady Growth to Economy In this Issue Several factors are lending support to consumer spending, which is expected to experience solid growth through the end of this this year and into the next. Consumer Providing Steady Growth to Economy 1 By Chris Mier, CFA | Strategist Economic and Interest Rate The trajectory of economic growth is expected There are a multitude of factors lending Forecast — July 2018 3 to slow from 2018 to 2019 with GDP growth support to consumer spending. Household Market Review Data Diffusion | for the year expected to come in at roughly balance sheets are in solid shape and are well ADS Index 4 3.0% in 2018 and to fall to between 2.0% and insulated from rising short term interest rates 2.5% in 2019. While there are a number of given the low exposure to revolving credit as a Houston Continues to Rebuild causal factors implicated in the expected percentage of total debt. The ratio of After Hurricane Harvey 5 slowdown—higher interest rates, the household debt to disposable income has Investment Trends among Muni diminishing impact of fiscal policy, the impact bottomed at a favorable level and will sustain Bondholders 8 of protectionism, the longevity of the the capacity to spend longer-term. recovery—consumer spending is not likely to Delinquencies, absent some problems in the Auto Industry Struggles to Keep Pace 12 be one of them. The Loop economic forecast student loan sector and upturns in autos and anticipates consumption of 2.4% in 2018 and credit cards, are manageable. Home equity Market Review Historical Monthly an uptick to 2.6% in 2019. After a winter has risen above its previous peak, yet Bond Price Changes 17 slowdown in the first quarter, consumer consumers are not moving nor are relying on spending is expected to be on a steady glide home equity to support additional spending Market Review The Yield Curve 18 path through this year and into the next. through borrowing. Wealth effects are Market Conditions 20 supportive, with generally high equity prices Real PCE Grows While Variability of that are only about 2% from their highs (and Loop Capital Markets Upcoming Data Falls 40% above January 2015 levels) and housing Negotiated Calendar 21 values that are still rising broadly across the Real PCE (MAVG12/STDEV12) country. The S&P/Case-Shiller 20-City 2.0 Composite Home Price Index moved to 1.5 progressively higher year-over-year increases, from 4.3% in January 2015 to 6.5% in April 1.0 2018. 0.5 The labor market is highly favorable with 0.0 respect to the ongoing strength of 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 (0.5) consumption. The tightness of the labor market is drawing from people available for (1.0) Real PCE (MAVG12/STDEV12) work and causing the Labor Force Linear (Real PCE (MAVG12/STDEV12)) Participation Rate to rise. The LFPR rose by Source: Bureau of Economic Analysis over 600K jobs in June alone. Continued on Page 2 Municipal Strategy Report July 2018 Consumer Providing Steady Growth to Economy The favorable fundamentals are not without potential pitfalls. Gas Job growth is accelerating from September 2017 levels on a 12- prices, which have risen by about one-third over the past year, are month moving average basis. There are now more jobs available high and subtract from consumption. Protectionism raises the than there are candidates to fill them. While wage growth is specter of higher product costs and inflation. China has been growing moderately, employers are using bonuses, health care, and focusing on consumer electronics in terms of their retaliatory vacation benefits to entice workers into taking open positions. This responses to our tariffs. The headline CPI release for June was a has suppressed traditional measures of wage growth, although the heady 2.9% on a year-over-year basis. The prospect of inflation broader measure Employment Cost Index is showing the impact growing faster than wage inflation is a potential concern as it would with a year-over-year increase of 2.7%. The JOLTS data affirms the detract from growth in spending. As the Fed makes progress on strength of the labor market with more employees finding the their inflation target, consumers will be facing constraints to confidence to leave current jobs in search of a better opportunity. spending and higher interest rates as normalization continues. At Major confidence and sentiment surveys confirm the high optimism present, though, these are potential concerns that may not fully among consumers. The University of Michigan Consumer materialize. The favorable environment for spending is at present a Sentiment Index and the Conference Board Consumer Confidence reality. We are all familiar with the phrase “Don’t fight the Fed”, Index are at 98.2 and 126.4, respectively—both near long-term investors may be well served to apply that logic to the consumer as highs. The surveys are consistent in implying continued strength in well. consumption. Gasoline Prices Pose a Threat to Consumption Gasoline RBOB Futures 250 20% 15% 200 10% 150 5% 0% 100 -5% 50 -10% 0 -15% RBOB GASOLINE %YoY Source: Thomson Reuters Eikon Page | 2 Municipal Strategy Report July 2018 Economic and Interest Rate Forecast — July 2018 Factors Supportive of Lower Rates Factors Supportive of Higher Rates Real GDP growth was revised to 2.0% rate in Q1 vs. 2.2% Nonfarm payrolls jumped 213K in June, while May reading was consensus estimate amid the weakest performance in consumer revised up by 21K. JOLTS report shows that the number of spending in nearly five years. employees who quit their job for a better opportunity reached a 17- year high. Durable goods orders fell 0.6% last month as demand for transportation equipment softened. Retail sales grew 0.5% in June, after increasing 1.3% in May, cementing expectations for robust Q2 economic growth. Housing starts slumped 12.3% in June to a 9-month low, suggesting homebuilding may have plateaued amid more PPI rose 0.3% in June, or 3.1% YoY, the biggest annual increase in expensive lumber and land and labor shortages. 6.5 years. CPI increased 2.9% YoY, the highest rate since February 2012. Retaliatory protectionist measures implemented by the U.S. and its major trading partners represent a headwind for the global U.S. vehicle sales rose 3.1% in June to 17.4 million annualized on economy. strong sales of light trucks. U.S. construction spending increased 0.4% in May to record $1.31 trillion annual rate. Figure 1 Economic and Interest Rate Forecast — July 2018 1Q’17 2Q’17 3Q’17 4Q’17 1Q’18 2Q’18 3Q’18 4Q’18 1Q’19 2Q’19 3Q’19 4Q’19 Avg'17 Avg'18 Avg'19 Econom ic Forecast s Real GDP 1.23.13.22.92.03.83.12.91.92.72.72.62.33.02.5 Core PCE Deflator 1.81.51.41.51.61.92.32.22.32.22.22.11.62.02.2 Unem ploy m ent Rate* 4.74.34.34.14.13.93.83.83.73.63.73.84.43.93.7 Nonfarm Payrolls (chg in 1000s) 532 569 425 662 655 632 525 495 460 450 440 440 2,188 2,307 1,790 S&P 500 2,327 2,398 2,467 2,603 2,733 2,703 2,800 2,844 2,890 2,935 2,982 3,029 2,449 2,770 2,959 Short-Term Interest Rates* Fed Funds Target (%) 0.70 0.95 1.16 1.20 1.44 1.74 1.89 2.16 2.41 2.68 2.88 2.88 1.00 1.81 2.71 3-Month LIBOR (%) 1.07 1.21 1.31 1.46 1.93 2.34 2.46 2.70 2.92 3.16 3.25 3.30 1.26 2.36 3.16 7-Day SIFMA (%) 0.69 0.84 0.82 1.05 1.21 1.46 1.35 1.55 1.65 1.80 1.90 2.00 0.85 1.39 1.84 Treasury Interest Rates* 2-Year Treasury (%) 1.24 1.29 1.36 1.69 2.15 2.47 2.63 2.84 3.03 3.24 3.30 3.32 1.39 2.52 3.22 3-Year Treasury (%) 1.51 1.47 1.51 1.81 2.30 2.61 2.74 2.90 3.07 3.26 3.31 3.33 1.57 2.64 3.24 5-Year Treasury (%) 1.94 1.81 1.81 2.06 2.53 2.77 2.85 2.95 3.10 3.27 3.35 3.37 1.91 2.77 3.27 7-Year Treasury (%) 2.25 2.07 2.06 2.25 2.68 2.88 2.96 3.01 3.14 3.29 3.37 3.39 2.16 2.88 3.30 1 0-Year Treasury (%) 2.44 2.26 2.24 2.37 2.76 2.92 3.07 3.09 3.20 3.33 3.40 3.42 2.33 2.96 3.34 30-Year Treasury (%) 3.05 2.90 2.82 2.82 3.03 3.09 3.21 3.31 3.41 3.52 3.58 3.60 2.89 3.16 3.53 Mu n icipa l In t er est Ra t es* 3 0 -Y ea r MMD (%) 3.08 2.86 2.75 2.71 2.91 2.99 3.08 3.15 3.24 3.31 3.33 3.35 2.85 3.03 3.31 Muni Yield Curv e Slope (%) 2.21 2.02 1.93 1.58 1.51 1.36 1.40 1.27 1.26 1.18 1.10 1.02 1.93 1.38 1.14 P: Preliminary Data * 3-month average Source: Loop Capital Markets’ Analytical Services Division and Short-Term Desk.

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