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Economic Update

October 27, 2014

Economic themes: Fed Watch, Brazil, Euro Stress Tests, Housing, CPI.

  • Fed Watch: The Federal Reserve will be meeting 10/28/14 and 10/29/14, followed by a meeting announcement scheduled for 10/29/14 at 11:00am PDT. Market participants are predicting the Federal Reserve will announce the end to their quantitative easing program, which originally commenced in September 2008, and has amassed $3.5 trillion in assets. Whether or not the economy is strong enough to stand on its own is still up for debate.
  • Brazil: President Dilma Rouseff was reelected over the weekend, sending Brazilian markets tumbling on the basis that economic reforms will not occur. Under her leadership, Brazil has been in a recession, with the slowest growth in two decades, but has managed to keep unemployment low.  She has been criticized for overspending, excessive intervention in certain sectors, and high inflation.  The Brazilian stock exchange, Bovespa Index, has fallen 25% since she took office in January 2011.
  • Euro Stress Tests: The European Central Bank stress test results were in line with expectations, with 105 out of 130 banks passing the balance sheet test, although concern remains with slow growth, low business confidence, and a lack of lending.
  • Housing: Pending home sales increased by 0.3% in September, below forecasts of a 0.8% increase, led by gains in the south and northeast regions. Homebuyers have been benefitting from low mortgage rates, an improving job market, and softening prices.  Pending home sales increased by 2.4% in September, though have fallen 1.7% over the past year.  Prices fell by 4% on the month, though are still up 5.6% over the past year.  New home sales increased to a 467k unit pace, with prices falling 9.7%, encouraging buyers.
  • CPI: The Consumer Price Index increased by 0.1% in September, and is up 1.7% over the past year. The consumer has been benefiting from falling energy prices, though has been offset by rising food prices.  The weak inflation could give the Fed more room to keep the Federal Funds Rate near record lows, with the Federal Funds Futures contracts implying a rate increase in September 2015.
  • Economic highlights for the week ahead:
    • Tuesday, 10/28/2014: Durable Goods, Case-Shiller HPI.
    • Wednesday, 10/29/2014: FOMC Meeting Announcement.
    • Thursday, 10/30/2014: GDP, Jobless Claims.
    • Friday, 10/31/2014: Personal Income and Outlays, Consumer Sentiment.

Municipal market themes: Puerto Rico.

Puerto Rico: The Commonwealth’s infrastructure financing authority is looking into refinancing approximately $2 billion of debt for the Highway and Transportation Authority, in order to repay a loan to the Government Development Bank.

 

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