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Economic Update

May 11, 2015

Economic themes: Europe, Employment, China, International Trade.

  • Europe: Negotiations continue with Greece and their creditors, as a €750 million payment to the IMF is due on Tuesday, May 12, 2015. Greece has adequate funds on hand to make the payment, though their weak cash position will need to be bolstered through subsequent bailout payments.  Major sticking points are employment and pension reforms, among others.  Markets are anticipating these negotiations to be ongoing for months, and to heat up prior to each scheduled release of financial aid. The can is being perpetually kicked down the road, as the far left leaning Syriza party continues to stubbornly refuse to back down from their self-imposed “red lines”.
  • Employment: Nonfarm payrolls increased by 223k in April, slightly beating forecasts of 220k, with the unemployment rate falling by 0.1% to 5.4%, and wages increased by a modest 0.1%, though are up 2.2% over the past year. Strength was seen in the construction sector posting a 45k gain, which could bode well for real estate, though manufacturing was relatively flat, up 1k.  The labor participation rate increased 0.1%, to 62.8%.  Markets rejoiced, as it demonstrated that employment is posting solid growth, but not too fast that it would encourage the Fed to become more hawkish.
  • China: The People’s Bank of China cut the 1-year lending rate by 0.25% to 5.1%, marking the third cut in the past six months, as the government strives to stoke the world’s second largest economy. Imports and exports have both been sinking, as inflation has been subdued, resulting in markets anticipating future stimulus measures as the Chinese work to meet their 7% growth target.  Bad news is good news, and good news is bad news.
  • International Trade: The U.S. trade deficit surged in March to $-51.4 billion, the largest since October 2008. Imports increased at a faster pace than exports, led by large increases in cell phones, though exports increased modestly due to aircraft orders.  The West Coast port strike also played a factor, which could be among the Fed’s “transitory factors” in analyzing the Q1 GDP figures.
  • Economic highlights for the week ahead:
    • Wednesday, 5/13/2015: Retail Sales
    • Thursday, 5/14/2015: Jobless Claims, PPI
    • Friday, 5/15/2015: Industrial Production, Consumer Sentiment

Municipal market themes: Puerto Rico, Illinois.

  • Puerto Rico: In an effort to spur the legislature into action, the government released a financial report detailing that they “may lack sufficient resources to fund all necessary governmental programs.” After failing to pass tax reform, years of economic malaise, and general population declines, the Commonwealth needs to implement reforms to pay bills over the long term.  Proposals on the table could include increasing the sales tax by 2-3%, major spending reductions, access to the capital markets, a moratorium on the payment of debt service, or a debt adjustment.  The Commonwealth appears that it will have a deficit of $191 million in the current fiscal year, though is scheduled to have a deficit of $2.4 billion in the upcoming fiscal year without any reforms.  Hopefully the legislature will hear this call to action.
  • Illinois: The lowest rated state failed on Friday to pass reforms on its $111 billion pension shortfall, resulting in some analysts calling for further downgrades. After multiple years of skipped payments, the pension system is only funded at 39.3%.  The ruling could add $1 billion to the already forecasted $6.2 billion budget deficit for the 2016 fiscal year.

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