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March
22
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Week In Review

The Fed

As expected, the Federal Reserve Open Market Committee (FOMC) announced its decision to maintain the federal funds rate at the current range of 2.25% to 2.50%. According to the Fed statement, the labor market remains “strong” but “the growth of economic activity has slowed.” Job gains have been solid and unemployment stayed low. The committee noted that recent indicators point to slower household spending and business investment in the first quarter. The committee also stated that overall inflation declined due to lower energy prices and that indicators of longer-term inflation expectations are little changed. The Fed maintained its dovish tone reiterating it “will be patient” in its approach to monetary policy in light of global economic and financial developments as well as muted inflation pressures. Looking forward, the Fed’s Summary of Economic Projections showed the majority of members expect no additional rate hikes in 2019, down from two in the December forecast. Additionally, the Committee reduced its growth forecast for 2019 to 2.1% and 2020 to 1.9%. Inflation expectations were also lowered to 1.8% and 2.0% in 2019 and 2020, respectively.

Our Take

The lowered projection for additional rate hikes this year suggests the committee believes the current rate level is at, or near, neutral. While the committee continues to expect modest growth and inflation near 2%, members clearly see a downward bias in the underlying economy.


Brexit

The EU agreed to allow May a short extension to make a final attempt to get her deal through Parliament and implemented by May 22nd. If May is unable to get her deal through Parliament by April 12th then the UK government will have to decide whether to exit with no deal on May 22nd or ask for a longer extension and participate in the upcoming European Parliament elections. EU leaders have indicated that Britain would have to set out a clear plan of how to break the current political deadlock in order to be granted a longer extension.

Our Take

This week’s agreement buys May time for one more shot at passing her deal. If May’s deal does not pass, a no-deal Brexit is the default option and will happen on May 22nd unless May or a new leader can offer a credible commitment to negotiating a new deal that is acceptable to both the EU and to Parliament.


Europe

European manufacturing data showed widespread weakness in Germany and France, largely due to declining export demand. Yields on European government debt declined with 10-year bund yields going negative, and the Treasury yield curve inverted from 3 months to 10 years.

Our Take

Hopes that Europe was experiencing only a temporary slowdown were dimmed by this release. The yield moves in Europe and the U.S. indicate that markets expect the ECB and the Fed to need to act even further to support growth.


Municipals

Standard & Poor’s affirmed Connecticut’s “A” credit rating this week and upgraded the state’s outlook from stable to positive. This marks the first time in 18 years that Connecticut’s outlook has been upgraded. Connecticut is expected to sell $850 million of general obligation bonds next week.

Our Take

Connecticut’s Governor Ned Lamont and lawmakers have worked to improve the state’s fiscal health. Governor Lamont’s budget proposal adds to the state’s reserves, which S&P viewed as a positive. The outlook upgrade is good news for bondholders, yet Connecticut remains one of the lowest rated states in the nation.