April 6, 2015
Economic themes: Employment, Fed Comments, Earnings Season, Manufacturing, Housing.
- Employment: Nonfarm payrolls increased by 126k in March, the weakest growth since December 2013, missing the most pessimistic forecasts. January and February figures were revised down a net 69k. The unemployment rate held steady at 5.5%, as the labor force declined by 0.1% to 62.7%. Hourly earnings were up 0.3% on the month. Strength was seen in professional and business services, healthcare, retail and mining. Construction, manufacturing, transportation, and government were weaker than expected. Overall the figures contributed to dovish sentiments from market participants.
- Fed Comments: Following Friday’s employment report, equity market futures fell by approximately 1%, until the Fed started talking this morning. New York Fed President William C. Dudley stated that once the Fed begins to tighten, their increases are likely to be “shallow,” and referenced that, “headwinds in the aftermath of the financial crisis are still evident.” The Fed last raised interest rates in 2006. As has been the case, bad news is good news, and good news is bad news. Federal Funds futures indicate a 27% chance of a Federal Funds Rate increase by the Fed’s September meeting, down from 34% prior to the employment report. If the Fed continues to focus on their dual mandate of employment and price stability, they may have a difficult time increasing the Federal Funds Rate in 2015.
- Earnings Season: Alcoa will kick off earnings season this week. Forecasts for the S&P 500 call for profits declining by 5.8% attributed to the strong dollar and falling oil prices. Markets appear to be very sensitive to signs of economic or corporate earnings weakness, though dovish comments from the Fed very quickly offset the concern.
- Manufacturing: The ISM Manufacturing Index posted a 51.5 reading in March, the lowest since May 2013, missing forecasts of a 52.5 reading. The figure still implies the sector is expanding, but at a slower rate than anticipated. Much of the weakness was due to slowing exports associated with the strong dollar.
- Housing: Home prices are showing some strength, with the S&P Case-Shiller home price index up by 0.9% in January, marking the third consecutive monthly increase, with prices up 4.6% over the past year. Gains were seen across all regions, with the greatest strength seen out west. Prices have benefitted from weak inventory and rising consumer confidence.
- Economic highlights for the week ahead:
- Wednesday, 4/08/2015: FOMC Minutes.
- Thursday, 4/09/2015: Jobless Claims.
Municipal market themes: PREPA, California Water.
- PREPA: The forbearing bondholders for the Puerto Rico Electric Power Authority announced a $2 billion financing proposal that could avoid a July 1st default on a $400 million debt service payment. They claim the deal would “generate electricity at lower and more stable rates, create hundreds of new jobs, stabilize electricity rates below the 2014 average, while continuing to service contractual debt obligations and allow a workout of over $700 million that Commonwealth government entities owe to PREPA.” PREPA has referred to the creditors’ disclosure of their offer as misleading, expressed doubts over certain unspecified aspects of the plan, and refrained from commenting on the substantive aspects.
- California Water: Governor Jerry Brown detailed the first ever statewide mandatory water restrictions last week. The objective is to reduce water usage by 25% in the wake of a severe drought and a Sierra snowpack at 5% of average. The mandate focuses on golf courses, cemeteries, and landscaping, as well as encouraging people to replace old appliances. Agricultural users, who represent 2% of California’s economy and consume 80% of California’s water, will be required to increase reporting, but will not be asked to further cut back water usage, thanks to their powerful lobbying efforts. While most water agency bonds should be minimally impacted, if at all, we encourage investors to focus on customer base, source of water, net revenue, and current liquidity position. Keep your eyes out for the development of desalinization plants.
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