• 2016 Q3 GDP comes in higher than expected at an annual rate of 2.9%, leading to positive momentum.

• Jobs claims, Fed’s balance sheet and International Trade reports all post positive numbers, yet both the Consumer Confidence and the Consumer Sentiment Indices decline.

• FBI reopens its probe on the Hillary Clinton email scandal late on Friday, 11 days before the presidential election. This caused two-year Treasury yields to gain for the day, and the interest rate hike probability hit 69%.

• On Friday, the 2016 Q3 GDP numbers came out better than expected at an annual rate of 2.9%. This was stronger than the Q2 pace of 1.4% and is the fastest recorded growth rate in two years. In examining the data, the acceleration was caused by a buildup of business inventories and possibly a one-time jump in exports. This positive momentum adds even more certainty to whether or not the Fed will raise interest rates toward the end of the year. For bondholders, this is likely to drive up yields and bring down prices.

• The Consumer Confidence Report released last Thursday indicated that the index dropped slightly in October, and now stands at 98.6 compared to 103.5 in September. This decline is not unexpected, as many investors are uncertain over the outcome of the presidential election in the coming days.

• The International Trade Report indicated the trading gap in goods narrowed sharply in September to $56.1 billion versus the $59.2 billion in August. Exports rose 0.9%, while imports declined by 1.1%. Stronger exports are a bullish indicator for both the dollar and the U.S. economy.

• The jobless claims fell by 3,000 to 258,000 for the week ending October 22; however, the four-week average rose by 1,000 to reach 253,000. This also marked 86 straight weeks that the claims have been below the 300,000 threshold, which is a psychological level for a strong market. Going forward, a continual decline in claims, paired with growing GDP figures, would indicate the economy is slowly growing. However, recent trends over the last few months have suggested the economy is stagnant, as the average has leveled off.

• According to the latest report, the Fed’s balance sheet decreased by $13.1 billion, after increasing by $9.7 billion the week prior. This puts total assets at $4.45 trillion. The reserve bank credit also decreased by $4.6 trillion. Since the Federal Funds rate is low, economists use this report as a way to view the Fed’s role in injecting liquidity into the market. This suggests that the Fed is looking to raise interest rates by selling off some of its assets to the dealers.

• The Consumer Sentiment Index turned out to be lower than expected at 87.2 versus the consensus of 88.5. This is also down from the previous month’s level of 91.2. This decline shows that half of all consumers are expecting a downturn within the next five years, according to a survey conducted by the University of Michigan. This survey also indicates that consumer spending is likely to go down within the next five years with the forecasted downturn.

• According to Bloomberg, the odds of an interest rate hike in December are 74% as of Friday morning, up from 68.3% last week. However, late Friday afternoon, the FBI announced that it would reopen the probe into the presidential candidate’s email scandal during her time as Secretary of State. This caused two-year security yields to gain for the day, and caused the probability of a rate hike to decline to 69%. Bondholders with longer-term maturities saw prices come down dramatically, due to being further out on the yield curve.

• Both Treasury and municipal bond yields increased for the week, especially in the longer-term maturities. The last four weeks continued a growing trend, as the market expects interest rates to increase in December. Credit spreads also narrowed on the longer-term maturities, with the largest spread currently at the 5-year maturity. As municipal yields grow higher than the comparable Treasury, municipal bonds become the more attractive investment. Currently, the 30-year municipals are 2 BPS higher than treasuries making them a potential opportunity. The mid-range municipals, like the 5-year, are still 15 BPS below treasuries and, therefore, not as attractive. For more information on the relationship of municipal bonds to Treasuries, click here.

• Following the year-long winning streak that was broken last week, the municipal market funds came back to positive inflows at $334.9 million, following the trend of the outflow of $135.9 million last week. For a quick refresher, check out our previous week’s market update article here.

• According to the S&P Municipal Bond Index, which is a broad, market value-weighted index, this month has shown a -0.95% return as of 28 October. However, year-to-date, the index is still up 3.22%. For the last month, the decline of -0.95% was solely due to the market pricing in the expectation of a rise in interest rates, causing bond prices to decline.

Upgrade

• Moody’s upgrades Selinsgrove ASD PA’s GO to Aa3; assigns Aa3 to GO bonds: The general obligation bonds from Selinsgrove Area School District in Pennsylvania – which currently have a $9.9 million of outstanding debt – got a ratings upgrade from A1 to Aa3. Many bonds in the Commonwealth of Pennsylvania have been upgraded due to the region’s positive Aa3 stable outlook. Moody currently uses an assessment called the “State Aid Intercept Programs and Financings: Pre and Post Default,” which judges the quality of bonds issued in state-aided programs. Since both Pennsylvania and the Selinsgrove ASD had very high scores, such as the debt service coverage ratios, Moody’s upgraded the rating. To learn more about other muni bonds issued by the state of Pennsylvania, click here. You can view the rating history of Selinsgrove Area School District’s muni bond issues here.

Downgrade

• Moody’s downgrades New Mexico’s GO bonds to Aa1 from Aaa; outlook is negative: Moody’s downgraded the general obligation bonds for the State of New Mexico from Aaa to Aa1. There is currently $327 million of outstanding debt, and a negative outlook going forward. The downgrade comes from the depletion of New Mexico’s general fund caused by a shortfall of tax revenues for 2016. With this shortfall, the state’s liquidity is considerably weaker, but not yet in danger of default. Investors with New Mexico-issued bonds need to keep an eye on the tax revenues and economic situation in the next few months to avoid further downgrades. To learn more about other muni bonds issued by the state of New Mexico, click here.

Using our Moody’s report section, find out what other muni bonds were upgraded or downgraded during the week.

We provide this report on a weekly basis. To stay up to date with muni bond market events, come back to our news page here.