March 23, 2015
Economic themes: Fed, Greece, Oil, Housing.
- Fed: Upon the culmination of their March meeting, the Federal Reserve announced that they will no longer be “patient” in raising interest rates, though stated that an increase in the Federal Funds Rate will not likely occur following their next meeting in April. Their two somewhat vague conditions for a rate increase include “further improvement in the labor market,” and inflation running closer to their mandate of 2%. In their meeting announcement, the Fed reduced their forecasts for both economic growth and inflation, noted the economy is “expanding at a solid pace,” recognized weakness in export growth attributed to a strong dollar, and believed the housing recovery has been slow. The comments were more dovish than the market expected, sending global equities to their biggest weekly rally in two years on the premise interest rates will stay low longer, and sending the Nasdaq to a 15-year high, nearly touching the highs of the dot-com bubble. The 10-year Treasury has rallied 30bps over the past two weeks on the dovish comments and economic data.
- Greece: Greek leaders are meeting with European leaders in Berlin on March 23, 2015 to discuss the stalled bailout program, and the February agreement to “present a full list of specific reforms” necessary to fund future bailouts. Some are concerned that a lack of reforms could result in Greece being kicked out of the Eurozone, which would likely be detrimental to the economy. It appears Greece could run into liquidity issues if another round of funding is not secured by early April. Markets are anticipating they will reach an agreement.
- Oil: The persistent oversupply and weakening demand of oil have caused several North American extractors to rethink major capital projects, with many existing projects barely covering costs, future projects dependent on higher prices, and smaller producers struggling to stay afloat. Previous oil crashes had been shorter in duration, or had been relieved by accommodative policies. Low oil prices have played a major role in reducing inflationary expectations, contributing to more dovish language coming out of the Fed.
- Housing: Existing home sales increased by 1.2% in February to a 4.88 million unit pace, below forecasts of a 4.94 million unit pace, led by gains in the south. The market has 4.6 months of supply, down from 4.9 months a year ago, and prices are up 7.5% over the past year. Housing starts fell 17% in February to an 897k unit pace, below forecasts of a 1.048 million unit pace, though permits increased 3% to a 1.092 million unit pace. Some believe the harsh winter in the northeast slowed sales, and the figures provide the Fed with more fuel to stay dovish.
Municipal market themes: Puerto Rico, California Drought.
- Puerto Rico: Three Commonwealth legislators announced that they would file legislation to enable Puerto Rico to restructure their debt, which could include general obligation and COFINA issues. The amendment would require two thirds approval in the legislature and a majority of voters. The legislature has been working on a Highway and Transportation deal, which had become more viable after passing a 66% petroleum tax increase, though the threat to enable restructuring has upset some investors. Moody’s Investors Service called the threats a credit negative, though a spokesman for Puerto Rico’s non-voting member of US Congress, Pedro Pierluisi, said there is, “virtually no chance of being approved.” Moody’s is forecasting a PREPA restructuring could result in a 20 – 30% loss to bondholders.
- California Drought: Due to the persistent drought, California lawmakers are proposing an acceleration of more than $1 billion in bond spending. NASA scientist, Jay Famiglietti, reported that California has one year of water remaining in its reservoirs. A coalition of businesses, labor unions, and community groups are supporting the construction of a desalinization plant in Huntington Beach. We encourage investors in water debt to focus on net revenues, liquidity, customer base, and source of water for a given issuer.
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