Reinhart Week in Review by Madison Investments 9.24.2021


The Fed

This week, the Federal Reserve Open Market Committee left its accommodative polices unchanged with the federal funds rate at 0.0%-0.25% and asset purchases at $120 billion per month. However, the committee noted that it may be appropriate to begin to taper asset purchases in the coming months. According to the statement, if progress towards maximum employment and inflation targets continues as expected, “a moderation in the pace of asset purchases may soon be warranted.”

Our Take: Although no changes in rates or asset purchases were made at the meeting, the Fed opened the door to removing some of its accommodative polices sooner rather than later.

Evergrande

Chinese property developer Evergrande issued a statement that the interest payment due on a yuan-denominated bond had been “resolved via negotiations off the clearing house,” most likely meaning that the payment would be postponed but not be labeled a default. Evergrande thus far has not made an interest payment on a dollar-denominated bond that was due on Thursday, but the company has a 30-day grace period for that payment. The Chinese government issued instructions to Evergrande to avoid a near-term default on dollar bonds and focus on completing unfinished properties. The Chinese housing ministry directed its local units to supervise funds paid from homebuyers into escrow accounts to ensure that these funds are being used to complete properties. The Peoples Bank of China (PBOC) has stepped up liquidity injections into the Chinese banking system in order to ease any stresses.

Our Take: The Chinese government is trying to avoid a bailout of Evergrande, but it also wants to avoid the social unrest and negative impact to property values and household wealth that would accompany a default or bankruptcy. The government’s actions indicate that their priorities are in maintaining the availability of dollar funding for corporations and in preventing large losses to individual homebuyers and investors. This indicates that the plan is most likely for losses to be taken by Chinese banks, most of which are state-owned, and Evergrande’s suppliers. Even if the government is successful in overseeing an orderly wind down of Evergrande, Chinese investment in real estate and housing is likely to slow significantly, and this will be a headwind to Chinese growth rates.

Municipals

Chicago Mayor Lori Lightfoot released her 2022 budget proposal. The $16.7 billion plan includes a $76.5 million increase to the property tax levy and the use of $1.9 billion in federal coronavirus aid. The federal aid funds will allow the city to provide additional funding for police, violence prevention and mental health treatment, while the funds from the property tax levy will be used, in part, to fund the city’s four pensions. In addition, Mayor Lightfoot indicated that the city has experienced higher-than-expected revenue collections of approximately $210 million in 2021.

Our Take: Chicago is taking advantage of the federal coronavirus aid to fund certain programs and tackle revenue shortfalls. Due to the influx of federal aid, Mayor Lightfoot has been able to avoid spending cuts in the 2022 budget. Future budget decisions may be more complicated as the city’s spending needs grow and pension costs continue to rise.

“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.