January 13, 2014
Economic themes: Employment, FOMC Minutes, Earnings Season, International Trade
- Employment: Nonfarm payrolls increased by 74k in December, well below forecasts of 200k, and the unemployment rate fell to 6.7%, as the labor force decreased by 347k, bringing the labor participation rate to 62.8%, the lowest since 1978. Wage growth increased by 0.1%. While seasonal factors could certainly be at play, the weak report could give the Fed fuel to refrain from further tapering during its upcoming January 28-29 meeting.
- FOMC Minutes: In last week’s release, the Fed Minutes showed that most members feel tapering is appropriate, though there is much debate over the speed and timing of such a move. The doves argued the unemployment rate is still elevated and there is modest inflation, while the hawks argued the costs, effectiveness, and challenges associated with unwinding the program. A consensus believe the Federal Funds rate should remain near 0 until inflation picks up.
- Earnings season: 29 S&P 500 companies are scheduled to kick off earnings season this week. Analyst estimates call for a 4.9% increase in earnings and a 1.8% increase in sales, the most bearish in a decade. The index is currently valued at 15.6x earnings, compared to a five year average of 14.1x. The index is coming off its best rally in 16 years, leading to some market participants taking the opportunity to rebalance their portfolios.
- International Trade: The trade deficit narrowed to $-34.3 billion in November, compared to a forecast of $-39.9 billion, marking the lowest deficit since October 2009, largely due to a smaller petroleum gap, as domestic production is increasing.
- Economic highlights for the week ahead:
- Tuesday, 1/14/2014: Retail Sales
- Wednesday, 1/15/2014: Producer Price Index
- Thursday, 1/16/2014: Consumer Price Index, Jobless Claims
- Friday, 1/17/2014: Housing Starts, Industrial Production
Municipal market themes: California, San Francisco, Drought
- California: Governor Jerry Brown released his $106.8 billion budget for the upcoming fiscal year, commencing July 1, 2014, including a focus on paying down debt, building reserves, and increasing education spending. With the inherent volatility of the largest revenue source, personal income taxes, derived from capital gains, Governor Brown is trying to save during good times, allowing for general fund spending during bad times. Republicans are pleased by the fiscal restraint expressed in the budget, while Democrats are pleased that it includes investments maintaining and expanding economic opportunity. Washington ought to take note of the bipartisanship.
- San Francisco: As one of the better rated local credits, San Francisco is preparing a $210 million general obligation deal to continue to rebuild and expand San Francisco General Hospital. S&P cited a strong economy, strong budgetary flexibility, and strong management, offset by growing retirement cost pressure, to justify the City’s AA+(sta) rating.
- Drought: Fitch Ratings stated that California utility enterprises could be financially pressured due to the drought, including hydropower facilities. They expect the impact to be manageable and that local authorities have improved rate design, and more conservative budgeting to be sustainable.
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