• Labor market continues to show signs of strength, with positive ADP Employment and Jobless Claims measures.

• Fed Chairs announce gradual rate hikes throughout 2017, depending on Trump’s fiscal stimulus.

• Muni bond funds continue to bleed as decline persists into 2017.

• Be sure to review our previous week’s report to track the changing economic situation.

• The Fed’s Balance Sheet showed a weekly increase of $1.7 billion in assets, bringing the total level to $4.45 trillion. This moderate increase was to counteract the $17.6 billion decline from last week to stabilize interest rates.

• Chicago Fed Chair Charles Evans spoke on Friday and indicated that he remains cautious about the economic outlook for 2017. He expects two rate hikes for the year but if the economy and markets continue to show strength, an additional rate hike could be set in motion.

• Richmond Fed Chair Jeffrey Lacker announced that interest rates may rise more quickly than the market anticipates due to President Trump’s proposed fiscal stimulus.

• However, the Fed Chair of Dallas Robert Kaplan addressed his support for gradual rate hikes through the year and that it’s too early to anticipate any fiscal policy changes and probable tax reforms brought on by the new administration.

• The weekly change in Money Supply (M2) was up $24.4 billion, as mostly indicated by the declines in the U.S. stock market over the last few weeks that demonstrated investors are liquidating stocks to cash.

• Jobless claims came in significantly lower than the estimate, falling 28,000 to 235,000, and below the consensus estimate of 260,000. The four-week average declined by 5,750 to 256,750, which indicates the labor market is at its strongest in years. This week’s measure matches the November 17 measure for the two lowest figures in the past year.

• The ADP Employment Report announced 153,000 new jobs in the private payroll sector, lower than the consensus amount of 172,000. Although the measure came in lower than expected, the year was strong. Combined with low jobless claims, the labor market is showing the strongest levels in the last five years.

• The Gallup U.S. Consumer Spending Measure data released Tuesday at $105 to set a nine-year high for the month of December. This came in $7 higher than the previous month’s measure and $6 higher than the previous year’s measure. These measures substantiate the fact that consumers are confident in the economy and job market, thereby willing to spend more on discretionary items for the holiday season.

• The International Trade Balance Level declined by $45.2 billion, which was higher than the consensus figure of a $44.5 billion decline. This widening in the trade deficit was primarily led by the increased imports of oil, up nearly $1 billion to make it $9.9 billion for the month. Also, imports of industrial supplies rose by $2.3 billion during the month.

• Both Treasuries and municipals showed little movement for the first week of 2017. The 2-year treasury yield moved up by a modest 1 bps, but it decreased by 3 bps and 5 bps, respectively, in the 10- and 30-year maturities. The 2-year and 10-year municipals decreased 1 bps and 3 bps from the week before, while the 30-year maturity yield stayed flat.

• The largest credit spread continues to be in the 5-year maturity, with Treasury yields up 17 bps over municipals.

• For most of the 2016 year, muni bond flows showed a 54-week trend of inflows. However, during the end of the October and for most of 2016, there had been a continuous trend of outflows.

• Last week, municipal bond funds showed an outflow of -$1.52 billion and nearly -$7 billion over the last four weeks. With interest rates higher and rate hikes expected in 2017, it is evident that investors are fearful of the negative impact of rising rates and how they will cause municipal bond funds to decline. For further context, read the real impact of interest rate hikes on your bond portfolio.

• The city of Chicago issued over $577 million in bonds (Series 2016) that were rated A by Fitch and BBB by KBRA. The purpose of the bonds is to finance permitted projects approved by the Board of Education as well as to make a deposit to the Consolidated Debt Service Reserve Fund. Explore this page to see more bond issues from the City of Chicago

Upgrade

Moody’s Upgrades Buncombe County, NC to Aaa; Outlook Stable: The Aaa rating upgrade reflects the conservative budgeting practices and a growing, regionally important local economy, which has led to the county’s strong financial position. The rating further reflects an elevated but manageable debt burden. To explore additional credit reports about other muni bonds issued by the Buncombe County, NC, click here.

Downgrade

Moody’s Downgrades Fridley, MN’S GO to Aa2 from Aa1: The downgrade reflects Fridley’s significant increase in its debt liabilities after the current $50.5 million bond issuance. This is not to say that the downgrade decision did not factor in Fridley’s healthy reserve, sufficient tax base, average socioeconomic profile and moderate pension liability. Click here to browse through credit reports of other Minnesota-based muni bond issues.

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