Reinhart Fixed Income | Week in Review by Madison Investments 7.16.2021


INFLATION
Consumer prices rose 0.9% in June while producer prices increased 1.0%, as measured by the Consumer Price Index and Producer Price Index, respectively. Year-over-year, consumer prices are up 5.4% while producer prices have jumped 7.3%.
Our Take: Inflation is running considerably hotter than the Fed’s 2% target, though the Fed continues to maintain that current inflation is transitory and will abate once pandemic-induced pressures subside. There is a good possibility that the Fed is right as the majority of the heightened inflation is occurring in pandemic affected areas. However, the monetary floodgates remain wide open, and Congress is debating the addition of over $4 trillion in new spending. Once consumers have had their fill of items denied to them during the pandemic, spending may become more broad-based, leading to the possibility of more persistent inflation.

RETAIL SALES
Retail sales jumped 0.6% in June, far surpassing consensus estimates of a 0.3% decline. May sales were revised lower, from -1.3% to -1.7%.
Our Take: Despite May’s decline, retail spending is booming, likely fueled in part by drawdowns of pandemic savings and the continued spending of stimulus checks. Spending is currently above the pre-pandemic trend, meaning sales may slow somewhat in the near future as stimulus spending fades.

POWELL TESTIMONY
Testifying to Congress this week, Federal Reserve Chairman Powell stated that inflationary pressures, while higher than anticipated, are expected to be transitory. Inflation is being temporarily boosted by base effects, production bottlenecks and other supply constraints, all of which are likely to subside over the coming months. Powell added it would be a “mistake” for the Fed to act prematurely to combat inflation noting the Fed is still “a ways off” from reaching its “substantial further progress” benchmark set in December to justify a change in policy.
Our Take: There were no surprises in the chairman’s testimony. Although recent inflation data may push some Fed members to a more hawkish stance in upcoming meetings, the chairman remains committed to the Fed’s current accommodative framework.

CHINA
The Biden administration published an advisory warning about the risks of doing business in Hong Kong. The advisory stated that “Business and rule of law risks that were formerly limited to mainland China are now increasingly a concern in Hong Kong.” Chinese government access to data stored in Hong Kong was also a specific concern called out in the advisory. Beijing urged the U.S. government to stop interfering in China’s internal affairs.
Our Take: Following the imposition of the National Security Law in Hong Kong and the move away from “one country, two systems” Hong Kong is in danger of losing its status as a global financial hub and a gateway to the Chinese market. The Biden administration’s advisory is a step in the direction of further decoupling the U.S. and Chinese economies.

MUNICIPALS
Texas officials released a revised revenue estimate. Comptroller Glenn Hegar indicated that revenue is expected to reach $123 billion for the next budget cycle amid “exceptionally strong” sales tax collections. The estimate reflects an increase of $7.4 billion from two months ago.
Our Take: The Texas economy has rebounded since the state reopened and vaccination rates have increased. Hegar indicated that he expects the revenue growth and strong tax collections to continue, which is good news for the state.

“Madison” and/or “Madison Investments” is the unifying tradename of Madison Investment Holdings, Inc., Madison Asset Management, LLC (“MAM”), and Madison Investment Advisors, LLC (“MIA”), which also includes the Madison Scottsdale office. MAM and MIA are registered as investment advisers with the U.S. Securities and Exchange Commission. Madison Funds are distributed by MFD Distributor, LLC. MFD Distributor, LLC is registered with the U.S. Securities and Exchange Commission as a broker-dealer and is a member firm of the Financial Industry Regulatory Authority. The home office for each firm listed above is 550 Science Drive, Madison, WI 53711. Madison’s toll-free number is 800-767-0300.

Any performance data shown represents past performance. Past performance is no guarantee of future results.

Non-deposit investment products are not federally insured, involve investment risk, may lose value and are not obligations of, or guaranteed by, any financial institution. Investment returns and principal value will fluctuate.

This website is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.

“Madison” and/or “Madison Investments” is the unifying tradename of Madison Investment Holdings, Inc., Madison Asset Management, LLC (“MAM”), and Madison Investment Advisors, LLC (“MIA”), which also includes the Madison Scottsdale office. MAM and MIA are registered as investment advisers with the U.S. Securities and Exchange Commission. Madison Funds are distributed by MFD Distributor, LLC. MFD Distributor, LLC is registered with the U.S. Securities and Exchange Commission as a broker-dealer and is a member firm of the Financial Industry Regulatory Authority. The home office for each firm listed above is 550 Science Drive, Madison, WI 53711. Madison’s toll-free number is 800-767-0300.
Any performance data shown represents past performance. Past performance is no guarantee of future results.
Non-deposit investment products are not federally insured, involve investment risk, may lose value and are not obligations of, or guaranteed by, any financial institution. Investment returns and principal value will fluctuate.
This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.
Although the information in this report has been obtained from sources that the firm believes to be reliable, we do not guarantee its accuracy, and any such information may be incomplete or condensed. All opinions included in this report constitute the firm’s judgment as of the date of this report and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.