How Do Muni Bond Credit Ratings Work?

LIZ ANN SONDERS: I'm Liz Ann Sonders.

KATHY JONES: And I'm Kathy Jones.

LIZ ANN: And this is On Investing, an original podcast from Charles Schwab. Each week we analyze what's happening in the markets and discuss how it might affect your investments.

KATHY: Well, Liz Ann, it's February now, and it seems like January was a very long month to me. I'm sure our listeners are looking at the S&P fallback from all-time highs on what appear to be some surprisingly soft tech earnings. With that in mind, any new updates on earnings season?

LIZ ANN: Yeah, so the aggregate numbers still look OK, although the beat rate, which anytime you're in the middle of earnings season, a metric like that is going to jump up and down on a day-to-day basis as more incoming reports are released. But the beat rate, which is a percentage of companies that have beaten estimates, has dropped back down into the high 70s, and that was in the mid-80s recently. And the recent rash of many of the high-profile tech, tech-related companies has not brought with it universally better-than-expected numbers, and when you have had so much enthusiasm and hype and groups or mini groups like the Magnificent Seven, it does set up the possibility for disappointment if you get anything that's amiss, and I think some of the AI-related commentary from companies is maybe not bearing as much ripe fruit as people were hoping heading into earnings season. So that's why you're seeing what I call the growth trio of tech, communication services, and consumer discretionary, at least as we're taping this, taking it on the chin to a significant degree.

So Kathy, also, as we are taping this, you and I tend to alternate a bit in writing our Fed commentaries. And you often, and will I think this year, be put in the hot seat during Fed meetings that have new releases of the dots plots and summary of economic projections. This was not one of those meetings, but it was an interesting one. There were there were more red lines in the statement relative to the prior month. I just sent into publishing queue our write-up on it, and as always, the press conference brought some interesting tidbits based on the questions that Powell is being asked. So what are your takeaways from the statement and from what we heard during the presser?

KATHY: Well, you mentioned disappointment in terms of earnings, and there certainly was some disappointment in terms of the Fed meeting this time around, at least relative to sort of what the market had built in. So the market had started to discount a pretty high probability of a rate cut in March. That was taken off the table. 

I think the key here is that the Fed is wanting to see more evidence. That was sort of the key message coming from both the statement and from the press conference, as far as I was concerned. Powell noted that inflation has been near its 2% target for six months, but that six months wasn't long enough. So clearly there's a desire on the part of the Fed to make sure they don't make a policy mistake by cutting too soon. And he did note also that, look, the unemployment rate remains quite low, employment growth is still quite healthy, consumer spending is pretty healthy. I interpret that as sort of a, "What's the hurry here? Let's just make sure we get to our target and stay there before we initiate rate cuts," even though, arguably, real interest rates are quite high right now, and policy is restrictive. The Fed's not worried about that in light of the underlying strength in the economy. 

I was a bit surprised there was no talk of changing up the balance-sheet strategy. There had been some indications the Fed might want to start to taper its quantitative tightening program. That is, not allow as many bonds to roll off the balance sheet as it has been over the past year or so, but it appears that they're going to keep that program moving along at this pace for the time being. That's also a bit of a surprise because we've heard indications that the Fed would like to start to taper that before cutting rates. So they didn't take that initial step to prepare for a rate cut. Doesn't mean it won't happen.

Anyway, but it keeps us in the camp that says May is the more likely time for the first rate cut than March. So it looks like just delayed satisfaction here on the part of the markets, and that's a bit of a disappointment.

LIZ ANN: One attention grabber, I think, at least for me, when I was watching the presser and feverishly typing up bullets as we went through. And you and I started chatting about this a bit before our producer turned on the record. But I wondered your thoughts. For me, it was interesting. One particular line, and this was in response to a question, so it wasn't part of the statement or his initial comments before opening it up to Q&A.

It was the comment that almost every participant on the committee believes it will be appropriate to reduce rates at some point. And I think it was, you know, watching the chatter on various feeds like the Bloomberg newsfeed, I thought the word "almost" was interesting, and you and I were just, you know, wondering about what that was in reference to. The first name that popped into my head was Dallas Fed President Lorie Logan, who I think it was just earlier this year. So not all that long ago made a comment another rate hike not being off the table. So what were your thoughts? Did that capture your attention, too?

KATHY: Yeah, I was surprised by that. I thought it was more the consensus that the next move would be a cut. And it could possibly be Logan. She has been on the more hawkish side. Otherwise, there's probably a couple other candidates who just simply aren't sure we're there yet. But it did stand out to me that we don't even have the whole committee ready to cut rates yet. And here the market was already discounting it coming in six weeks. So clearly it's going to take more, and that was a key word Powell used, "More! I want to see more." Clearly it's going to take some more evidence for the committee as a whole to make a move. So …

LIZ ANN: And I think that's why Powell mentioned "healthy disparity of views." I think he wanted to emphasize that even though this decision to not cut was unanimous. There is still some disparity of views on the committee.

KATHY: Yeah, isn't that one of those PR words they use in politics? "We had a frank and healthy discussion," meaning we didn't agree on much of anything.

LIZ ANN: Well, he was using "risk management" a lot, too. He started to sound like a bond trader, Kathy, when I was listening to him.

KATHY: Oh no, we've taken over the world. I'm not sure that's a good thing. I just got the delay because we can delay was the message that I took away.

LIZ ANN: So this week we are going to be talking about municipal bonds, or Kathy will be spending time on municipal bonds. So what's on tap?

KATHY: Well, Liz Ann, this episode, I'm really excited about, I have my colleague Cooper Howard. And we had a chance to sit down and have a conversation with Jane Ridley, who's a senior director and the local government sector leader in the U.S. Public Finance Government Group at S&P Global, the rating agency.

Standard & Poor's is one of the big rating agencies and she's in the division that focuses on rating local governments and municipalities in the muni-bond space. And for bond investors, this is really important stuff. You need to understand what those ratings mean and how the rating agencies determine the rating before you invest.

LIZ ANN: That sounds great, Kathy. Looking forward to it.

KATHY: I'm pleased to have two guests today, Jane Ridley from Standard & Poor's and my colleague Cooper Howard, who's a director here at Schwab and our expert in the municipal-bond market. We're going to be talking about what analysts for rating agencies actually do and the role they play, as well as taking a closer look at the municipal bond market.

So I'm really looking forward to this conversation. Thank you both for being here. But before we dive in, I'm going to ask Cooper, can you just define what a municipal bond is for those who may not be familiar with them?

COOPER HOWARD: Of course, and thank you for having me on, Kathy. So a municipal bond is going to be a bond that's going to be issued by a city, a state, a local government. So something of that nature. Usually, they pay interest income that's exempt from federal income taxes and potentially state and local income taxes as well. So for investors who are looking for high-quality investments that are tax-advantaged, they can be a beneficial option.

KATHY: Great, thanks for that. Now, I'm going to turn to Jane, our special guest, and I'm going to ask you, what is a credit rating, and how should investors use them?

JANE RIDLEY: Well first, Kathy, thanks so much for having me on today. I'm really excited to be here. But a credit rating really at its most basic level is our assessment of the issuer's ability and willingness to pay back the debt on time and in full. Rating scale that we have represents the capacity to be able to repay the debt. And notably, S&P has only one scale for all of its ratings, which means any muni rating and corporate rating and anything else is all rated on the same scale. Muni ratings, in general, are concentrated at the higher end of the rating scale, particularly for states and governments. We have rating definitions that focus on an issuer's capacity to meet those financial commitments, and you really don't get down to insufficient capacity to make the payments unless you're down at the kind of the bottom end of the scale and non-investment grade.

KATHY: Right. And that's really important, I think, for people to consider. Cooper, how does, you know, what are your thoughts on how investors should approach credit ratings and how the market interprets them?

COOPER: Yeah, so I think the market interprets them as a measure of risk. So you and Liz Ann recently had a podcast where you discussed kind of how to manage your risk in a portfolio. And I think that that's a good starting point for investors to use credit ratings to help manage that risk in their portfolio, to understand how likely is it if I'm investing in this bond and I need interest income, how likely is it that this issuer is going to be able to pay me back on time as expected? So I think that that's a good starting point.

Something also that we generally think for a fixed income portfolio, that's not really where you want to be taking the risks in a portfolio, so it makes sense to stay up in credit quality and to focus on higher-rated issuers. So ones that are in the AAA- or AA-rated category, or I should say the investment-grade rated category.

KATHY: Yeah, we often talk about how most of the investors we talk with really don't look at the bond part of the portfolio as where they're going to get the excitement. And municipal bonds are famous for not being exciting, and that's a good thing. I'm going to go back to you, Jane, though. As a rating analyst, what do you look at to develop a rating? Are you looking at forward-looking things to develop it, you know, what the future looks like? Are you basically looking at the past, how do you go about doing that?

JANE: Yeah, that's a good question. And I will tell you, rating analysts do find it exciting, this municipal stuff. It might not be as thrilling on the yields, etc., but how governments work and how that all gets put together with our day-to-day is important from analyzing a muni bond, too. So we use criteria to develop the ratings and that has both historical and forward-looking pieces to it.

And every rating we assign at S&P is created within the framework of that criteria. So if we're evaluating governments, we're looking at the size of the tax base, we're looking at who the major employers are. We're also looking where income levels might be going in the future, so sort of projected income levels. Similarly on finances, we're looking at the most recent audit that's been put out, but we're also talking in depth with the issuer about their budget, about how revenue collections are going, and any projections that they have in terms of operating performance. And our goal is really to combine all the information together so S&P can provide an independent, forward-looking assessment that investors can use and through sort of by telling a credit story and what is going on with that rating.

KATHY: I think most investors are familiar with general obligation bonds, you know, issued by states and cities and other municipalities, but there's also revenue bonds, right, that are based on the revenue flowing from, say, an essential service, like a water district. So are there differences with how you approach rating those? Are they rated differently, or do you use similar criteria?

JANE: The criteria I think is similar sort of at a foundational level. They're both governments providing services. For a general obligation bond, as you mentioned, that is a broad pledge to repay really from anything that's available, kind of not nailed down. So it's important to understand when you're getting revenues in from that, what kind of flexibility the issuer may have if revenues come in lower than expected or expenditures come in higher. On revenue bonds, it's a specific revenue stream that's pledged, as you mentioned, in a water district. But we're looking at what's being generated. Is it user charges from water users? Is it sales taxes? What have collections looked like in the past? What might they look like going forward? So on a utility user charge like that, we're looking at where the demand is coming from. We're looking at, "Do you have the ability to change the rates in order to raise them if you needed to, in order to maintain your debt service coverage?"

Sales tax, which is another kind of revenue pledge, but a sales tax, you know, comes straight from a government, we're looking at things like what do the unemployment levels look like? How does consumer spending trends? If it's a local government, is there a big box store that is opening up one town over? Those kinds of things that can really put pressure on what the local collections would look like.

KATHY: So you're sort of an economist for the local region, as well as, you know, diving deep into budgets and projections for usage. I mean, I once knew a muni analyst who actually … there was a toll road that they were rating, and they went out and counted cars for a day on the toll road to see if it actually, the projections were actually accurate. It turns out they weren't. So he was given kudos for knowing that. But that's interesting.

Cooper, I wanted to ask you, when it comes to revenue versus general obligation bonds, should an investor focus on one versus the other? Should they look at both? How do you approach that as an analyst?

COOPER: Yeah, we do believe that they should focus on both and not a preference towards one versus the other. Really what should be the deciding factor is what is backing the bond? So what is the source of income that's coming in that's then going to be able to be paid the interest and the principal when that bond comes due? So if it's going to be something that's backed by a sales tax, usually that tends to be a little bit higher rated. If it's going to be backed by a full taxing authority of a state or a local government, that tends to be a little bit more safer.

Now, there are different types of revenue bonds that have a little bit bigger kind of business risk associated with them. So for example, healthcare and hospital. So that's a part of the market that tends to be a little bit riskier in the municipal bond market than something like a higher-education facility or a public higher-education facility, I should say. So we don't think that you should focus on one versus the other, really focus on what is the source of the revenue that's backing that bond.

KATHY: And that's where the ratings can help. Yeah, that makes sense. Jane, how frequently are ratings updated? I sometimes get the impression I'll look at a bond and realize that there hasn't been an update to the rating for a while. How does that work from your point of view?

JANE: Well, it's important—from the S&P perspective anyway—it's important to understand that if we, we might not put out a report every time that we update a rating, but we really are looking at them consistently. So if you have a subscription to S&P's CAPIQ platform and the ratings-derived platform where we have a lot of the muni stuff, there's a date on there that shows when the rating was last updated. It's called the last review date. That's always going to be within a 12-month period from when we are right now.

But we are looking at the portfolios on a consistent basis to make sure that it still sits within sort of the range of where it should be rated. We want to see if something's getting stronger, something's getting weaker. If it does seem to be sort of moving away from where it is at the current credit quality, then we will pull it out. We will do more research on it. And then sometimes there will be a rating change. Sometimes we'll just affirm the rating.

KATHY: That makes sense. I guess I should pay more attention to those dates. But, you know, speaking of sort of timeframe, that brings up a great question of, you know, how is time to maturity for the bonds that you're rating factored into the rating? In other words, you know, if you're looking at something, is it that it won't likely default in the next year, but over a longer period, is it just going to be reviewed over and over again? So say it's a 30-year bond. Do you approach that differently than one that might have a shorter time to maturity where you have maybe more clarity on the finances of the issuer?

JANE: Well, what we're trying to do is set a rating so that it can stay consistent, as consistent as possible, over the long-term horizon. If that's 20 years, 30 years, whatever it is to final maturity. We don't rate to say, oh, it's only in the next couple of years. And we do have outlooks, which speak to kind of a two-year period. But when we assign a rating, I don't want to get too technical here, but we actually are assigning a rating to an issue and not an issuer itself.

And so we're rating a bond that may have a 20-year maturity, may have a 30-year maturity. And we are looking at it, as I said, we're looking at it regularly. But that's an important part of the forward-looking analysis, too, that you asked about. Even if everything is fine now, but there's some significant sort of risks on the horizon that could really make a difference in the trajectory of the credit or something else, then we want to and we need to factor those risks in now. Also just, we don't change the ratings to AAA just because you had your final maturity coming up in six months, if you've already sent the debt service payment to the trustee, it might be golden. There's nothing else that's going to happen between now and then. But we're looking at the arc over time of the credit quality and not just what might happen say within, you know, six months, a year.

KATHY: Yeah, that's great to know actually because I think sometimes people feel more secure with a shorter term to maturity for a variety of reasons, but the ratings shouldn't really be the reason to feel more or less comfortable with the time frame. That makes sense. I want to go back to you, Cooper, for a second. Do you have suggestions about what maturities are looking more attractive right now for investors? Are there suggestions that we have on where somebody should start when they're planning a portfolio of muni bonds?

COOPER: Yeah, I think that it first starts with what's your personal individual situation. So how soon might you need the money to spend it? And then it kind of builds off of that. If we're looking at an average portfolio, we would suggest something around a six-year average maturity. That's about the benchmark for a broad index of municipal bonds. So that can be relatively appropriate. Getting even a little bit deeper, if you were to use a strategy, maybe a barbell strategy, that kind of combines some short-term municipal bonds with those of longer-term municipal bonds. We look at yields relative to Treasuries right now—they're more attractive for longer-term municipal bonds versus shorter-term municipal bonds, but having some short-term munis does provide that flexibility in case your situation does change.

KATHY: That's pretty much, I mean, something we have to monitor over time, too, is, right, those relationships change whether, you know, munis are attractive relative to, say, Treasuries of the same maturity or other options that you might have. So sometimes we just tell people to sort of spread out the maturity or, like you say, target an average duration that works for your portfolio instead of trying to time the market. But it's good to keep those valuations in mind.

Jane, I'm going to ask you a question that comes up a lot. Might be a little uncomfortable, but it comes up a lot, and I think people would love to hear an answer from someone at a rating agency. Coming out of the 2008 credit crisis, the rating agencies came under a lot of scrutiny due to the issues around rating mortgage-backed securities and some of the products based on mortgage-backed securities. Did this also apply to the muni market? In other words, what's the track record of ratings in the muni market that we should know about, or our investors should know about, maybe in comparison to what happened with mortgage-backed securities?

JANE: That's a very good question, and we do get that, and it's a fair question, about the kind of what happened with mortgage-backed securities during the Great Recession. S&P did have some lessons that it learned from that period of time, and those translated into things like providing greater transparency, which you can see in our criteria. S&P Global, like other credit-rating agencies, is a regulated entity, and so post-'08, we also made a lot of regulatory changes, globally.

And you mentioned the mortgage-backed securities. We did see some of the biggest transitions in that sector during that time. Those aren't the revenue streams that support muni debt, but municipal readings can default. We didn't see a spike of it during that period of time, but, unlike companies that can go out of business, governments are going to remain in place, and they might absorb, they might merge with one another. But they still need to exist, and they'll remake themselves in order to do that.

KATHY: Good to know, but I think if I'm not mistaken, historically, you haven't had those kind of problems in the municipal ratings that we saw in the mortgage-backed security market.

JANE: That is not something that we saw during the financial crisis in '08 and later, and it's not something that sort of had happened before or after that.

KATHY: Jane, many high-yield, or what we refer to as junk-rated munis, don't even have a rating. Why is this?

JANE: A lot of what we rate is higher grade, but S&P only rates on request. And so it's a self-selecting universe. So that decision really ends up being made by financial advisors, underwriters, other market participants. And I will say that getting a rating is a commitment. So there's the time that you spent up front to determine the rating. But even when an issuer isn't coming back to market and selling new debt, we do have to have conversations with them about making sure that we know what's going on with the credit quality. So our ratings are up-to-date for the marketplace, and that means giving us regular audits, answering our questions on a regular basis, because if we don't have that sort of essential information then we can't maintain the rating, and we do have to withdraw them sometimes.

KATHY: That's good to know also because there's quite a bit of the muni universe, the lower rated or unrated, that's out there, and it's good to know why they're not rated. 

Cooper, I'm going to go back to you for a second. The default rate for munis is low relative to, say, corporate bonds or similar, of similar credit quality, but why shouldn't investors solely focus on lower-rated munis so they can get those higher yields?

COOPER: Yeah, that is one of the benefits that's often touted of municipal bonds is that they have very low default rates. And I think that goes to the point of where the revenues are coming from. They tend to be from tax bases, things that are stable revenue sources. But if you look at default statistics, the number of defaults that do occur in the municipal bond market, they tend to be very highly concentrated in the high-yield municipal bond market. So if we were to take a pool of about 10,000 individual issuers, only four investment grade issuers of that 10,000 had defaulted, using Moody's statistics. Now, if you look at the high-yield portion of the market, that same 10,000 pool of issuers, you'd have 400. So a hundred times more issuers than in the investment-grade municipal bond market. So when you do see defaults, again, it is going to be in the high-yield portion of the market. 

Also, I want to make a distinction between municipal bonds and tax-exempt bonds. So we oftentimes think of municipal bonds that do pay tax-exempt interest, but they're usually bonds that we commonly think of at cities, states, water utility districts, things of that nature. Those that are in the high-yield municipal bond market, they still generally pay interest income that's exempt from federal income taxes, but they tend to be things that have very riskier business characteristics.

And I think that that's why you see a lot of those more defaults occur in that part of the market.

KATHY: So I think like any other bond, you know, the higher the yield, probably the more risk you're taking. That could be kind of a dead giveaway, even if there's no rating, right? We could look at the yield and say, "There's probably a reason there. It's probably riskier."

COOPER: Yeah, the market's assigning a rating to it in their view, even though maybe S&P or Moody's or Fitch or one of the other major rating agencies haven't rated it. The market's looking at it and saying, "Well, we don't really think that you might be able to pay back your debt on time. So therefore, we're going to demand a little bit higher of a return from you."

KATHY: So Jane, I have one more question for you, and that is, in the event of a default, what's at risk? Am I going to just miss my coupon payments? Am I not going to get my principal back? Do municipalities come back from default and start paying again? How does that work?

JANE: You would miss the coupon payments, and you would miss the principal payments. Now, if there is a workout and it's a restructuring that can come back, you might be able to get part of it. But in general, that's when the rating stops also. So I'll use as an example, the Detroit bankruptcy. Before Detroit filed for bankruptcy, or during that period of time, they also defaulted on some of their bonds. Now, through the bankruptcy process, some of those holders did receive some more payments. But the original set of bonds was, they stopped paying the coupons, they stopped paying the principal, etc. So you're not getting anything back from that standpoint.

KATHY: Yeah, that's good to know. Cooper, you were here at Schwab during a couple of those big events, Detroit, Puerto Rico, etc. What's your perspective on that?

COOPER: The thing that I would add to it is that the timing of when you'll receive some form of payment is also a very big unknown. So you may still get some form of a payment, whether it's a lump sum or a future cash flow, but you don't know exactly when it's going to be. For example, the Detroit bankruptcy, that was a very long, drawn-out process. Puerto Rico was even more of a longer and drawn-out process. And some of those bondholders still are negotiating and fighting over what is left. So the biggest thing is if you are investing in a municipal bond, you hope to expect this is what I'm using as a cash flow. And if it is something that defaults, that can really interrupt that cash flow.

KATHY: Yeah, that's really important because sometimes people look at the yields on some of these bonds and say, well, you know, as Jane said, they're ongoing entities, right? The city of Detroit's not going to disappear. Why don't I just buy the bonds and wait for them to catch up? But yeah, it may not work out that way.

JANE: Yeah, the negotiation afterward can make a difference. And you can come back to the municipal market. I mean, Detroit filed for bankruptcy in 2013, and there were the defaults and everything else, and they did come back, and they sell debt again. And the market was, you know, we rated it, and the market was willing to accept it, and it takes a little bit of time to sort of regain some of that credibility from a rating-agency standpoint, but we go back through it and make those evaluations again.

KATHY: Great. Well, I'm going to wrap it up here. I've got one more question for both Jane and Cooper. And this is a question I just love to ask all of our guests because I'm always curious. What do you read? So besides reading, I'm sure, budgets and statements of financial condition and all those things. What do you read to kind of keep up? Or what do you just enjoy reading? I think our listeners always enjoy book or article recommendations or podcast recommendations.

JANE: Well, I can start here. So just like I'm sure the rest of your listeners, I read The Wall Street Journal. I read The New York Times. There's our daily municipal industry newspaper's called The Bond Buyer. So I read that every day. I am also, since I'm a local government credit analyst, also I read the local papers for the credits that I'm working on. That gives a lot of insight to what may be happening there. So as an example, I'm the primary credit analyst for the city of Chicago. So I read the Chicago Sun-Times, and I read Crane's Chicago Business. There are also some online sources that I check regularly. There's a site called Route 50 that has state and local news analysis, so that will give you a lot of what you're looking for in terms of trends that are coming through. And then there are publications from big industry groups. Government Finance Officers Association, the GFOA, has a lot of information and newsletters and that sort of thing give you a really good idea again of what kinds of challenges are facing municipal issuers at any given time.

KATHY: That's really great. As someone who lived in Chicago for many, many years, I'm very familiar with the local papers and pretty much up on the local politics, which are pretty interesting these days. Cooper, how about you? What are you reading these days to kind of get a sense of what's going on in the markets?

COOPER: Well, I read a lot of what Jane had mentioned. So I like to read kind of what's happening in our local newspaper, Wall Street Journal, things of that nature. Bloomberg is also another source of information that I read. This might sound a little bit of a suck-up answer, but I also do read Jane's reports. So when she writes a report on what's happening in the local government, I do read what she's writing. So a lot of what the rating agencies are saying.

Personally also, this is a little inside baseball, or I guess I should say inside Charles Schwab, is that Kathy is very well known for when she gives a Christmas present, it's a book. So Kathy, right now, I'm reading the book that you gave to me. It's about Ray Dalio titled The Fund. And it's a really interesting insight into kind of how he built the fund and how he manages it and kind of him as a personality. So that's what I'm doing right now. I usually read before bed, so that's kind of what I do to help put me to sleep for the day.

KATHY: Right answer, Cooper. Yeah, right answer. You're reading the book that I gave you for Christmas. Very good. I found it a very interesting book myself. So I'm glad you're enjoying it.

Well, I want to thank you both for joining us. It's been illuminating for me. I've been in the bond business a long time. But I do not consider myself a real expert on the muni market because it takes time. It's very different from other parts of the bond market. So it's great to get your insight on how the muni market works and how their ratings work because they're such an integral and critical part of the market.

JANE: Thank you very much for having me on. I really enjoyed today.

KATHY: Thank you.

COOPER: Thank you, Kathy.

LIZ ANN: That was awesome, great conversation, Kathy and Cooper. Very timely, very informative. Before we talk about next week, it's probably worth noting that we're taping this in advance of the release of the latest jobs report, which would be the January data. But rest assured, there will be lots of information, both of us will be putting on our X and LinkedIn feeds on that. So that's where you can find our most up-to-date thinking on that. 

But, you know, we do have some PMI data coming out next week, which these days, especially differentials between services and manufacturing are important to keep an eye on. And then in keeping with the attention on the labor market, especially given Powell's focus on that as probably being a key needle-mover in their decision around timing of rate cuts that puts the weekly data we get via unemployment claims and the differential between those initial claims and continuing claims in focus. So those are a couple of the things that I'm keeping an eye on for next week. What about you, Kathy?

KATHY: Yeah, similarly the jobs data, obviously really important. Once we get past that, the week after is usually relatively quiet for economic data. So, I'm actually going to be looking overseas and seeing what other central banks are doing. We've got some key central-bank meetings coming up and a lot of indications that various central banks are poised to cut rates, if they haven't already begun, that they're moving closer to that as inflation falls and economic growth slows. But in general, it looks like we might get a little bit of a breather, which is nice. Let the market absorb all this information, and let the chips fall where they may.

By the way, for anyone who's interested in learning more about our outlook for the bond market, you can look at our Bond Market Update. I post a link to it on my Twitter, X page, and on LinkedIn. And that's our monthly publication that gives you just a brief snapshot of our point of view on what's going on in the market.

LIZ ANN: And with that, we are going to wrap it up for another week. Thanks as always to everyone for listening and be sure to follow us, importantly, for free, since we are always talking about inflation, for free, in your favorite podcast app. And if you've enjoyed this episode, tell a friend please about the show or leave us a rating or review on Apple Podcasts.

KATHY: As we've mentioned on every episode, we both post a lot of charts and data analysis on X and LinkedIn. So yes, be sure to follow us if you want these updates. I'm @KathyJones—that's Kathy with a K—on X, formerly known as Twitter, and LinkedIn.

LIZ ANN: And I'm @LizAnnSonders, that's S-O-N-D-E-R-S on Twitter, or X, and LinkedIn, and because I have had a rash of imposters, some trying to pitch stock-trading services for me on other social media platforms like Facebook. I am not on Facebook. So if you get one, it's not from me. So imposters beware!

So on next week's show, I'm thrilled about this, we will be joined by two true experts, they're also friends, in the residential real-estate world: Dolly Lenz, very familiar to real-estate watchers, and her daughter Jenny Lenz, who run their own real-estate company together. And it'll be great to get their perspective on how interest rates have affected the real-estate world, what they're looking for this year, and a bunch of other things, so stay tuned for that next week.

For important disclosures, see the show notes or visit Schwab.com/OnInvesting, where you can also find the transcript.