August 24, 2015
Economic themes: Global equities, Commodities, FOMC minutes, Greece, Housing.
- Global equities: Remember when the Dow fell 1,000 points on the morning of 8/24/2015? The Dow opened down 1,000 points, though has since pared its losses, as global markets have been selling off over the past two weeks following China’s unexpected devaluation of the Yuan, erasing some $5 trillion in value. The Shanghai Composite Index fell 8.5% this morning in response to the government NOT intervening more in markets. Market participants had anticipated that the government would buy more shares and signal more accommodative monetary policies. European equities were down 5.3%, and emerging market equities fell 6% marking the seventh consecutive day of losses. The volatility index surged as high as 53.3, from 13 one week ago.
- Commodities: The rout in commodities is showing no end, with the Bloomberg Commodity Index falling as much as 2.7% this morning, marking the lowest level since August 1999. Oil has been getting hammered from a supply glut, and demand across most commodities has plummeted, partially attributed to a slowing Chinese economy. Currencies from resource-producing developing economies have been hit especially hard, including Russia, Malaysia, South Africa, and New Zealand.
- FOMC Minutes: In the minutes from their July meeting, the Fed said conditions for a rate increase were, “approaching,” though, “had not yet been achieved.” Many economists have been stating that a September rate increase will be inevitable, but the rout in equities over the past week has implied that the economy may be too sensitive to withstand a rate increase, reducing the probability of a September rate hike to 28%, though there is still a 51% chance of a December rate hike. Given weak inflation and a lack of wage growth, the Fed does not have much room to increase rates based on their dual mandate of price stability and employment. Expect much debate of Fed policy during their Economic Policy Symposium in Jackson, WY, beginning 8/27/2015.
- Greece: Eight months after obtaining power based on an anti-austerity pledge, Prime Minister Tsipras resigned on 8/20/2015 following the agreement of a third bailout, which was counter to his elected pledge. He has called for snap elections, where he will be running on a reinvented pro-bailout platform, as the best partner to implement structural economic reforms demanded by European creditors. Several parties with conflicting views as to what the best path forward would be for Greece will be vying for the top leadership spots in the September elections. The best course of action may be to have Greece leave the Eurozone and allow their currency to be devalued, enabling them to become more competitive in the global economy.
- Housing: Housing starts increased 0.2% in July to a 1.2 million unit pace, though permits declined 16% to a 1.12 million unit pace, led by declines in the volatile multifamily component, which was partially attributed to a New York real estate law that led to a surge in June permits. Existing home sales increased by 2% to a 5.59 million unit pace, with inventory falling to 4.8 months. The pace of sales was up 10.3% over the past year, and prices were up 5.6%. Housing appears to be among the stronger components of the economy, following weak factory and consumer data.
- Economic highlights for the week ahead:
- Tuesday, 8/25/2015: Case-Shiller, New Home Sales.
- Wednesday, 8/26/2015: Durable Goods Orders.
- Thursday, 8/27/2015: GDP, Pending Home Sales.
- Friday, 8/28/2015: Personal Income/Outlays, Consumer Sentiment.
Municipal market themes: PRASA, California Pensions.
- PRASA: The Puerto Rico Aqueduct and Sewer Authority had planned to delay a proposed $750 million deal until 8/25/2015, but will now have a day-to-day delay as they are trying to stoke demand. Whisper talks indicate it could be an 8% 2045 new issue at 9.5%, with 100m denominations. Despite stating that PRASA will be able to pay its bills, the Commonwealth is struggling to generate demand on their terms after talks of trying to enable their public enterprises to file for bankruptcy, and for refusing to appropriate funds for a Public Finance Corporation debt payment. There are certainly investors standing by ready to aid Puerto Rico, just not necessarily on Puerto Rico’s terms.
- California Pensions: Despite San Jose voters authorizing broad changes to pensions back in 2012, a recent settlement with the police and firefighter unions proved how challenging reforms will be. The agreement mostly impacts new hires, and does very little to modify existing employees and retirees. Former San Jose Mayor Chuck Reed is backing a ballot measure that would amend the constitution to allow local voters to address compensation and retirement benefits.
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