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Economic Update

October 28, 2013

Economic themes: Earnings Season, Manufacturing, Employment Report, Consumer Confidence, International Trade.

  • Earnings Season: The S&P 500 touched new highs this morning as we continue to wade through earnings season.  Those bullish on the U.S. believe the economy is benefitting from dealing with structural issues that developing economies are yet to fully address.  Of the 248 S&P 500 companies that have reported thus far, 76% have beaten earnings estimates.  Markets seem to be focused on this week’s Fed meeting.
  • Manufacturing: Industrial production increased by 0.6% in September, above expectations of 0.4%.  September aircraft orders helped increase new durable goods orders by 3.7%, above estimates of 2.5%.  Excluding the aircraft orders, the figure would have declined by 0.1%.  Other gains were seen in metals and electronics, with the figure held back by the government shutdown, and a weak employment market.
  • Employment Report: The economy added 148k to payrolls in September, below estimates of 185k, and the unemployment rate declined to 7.2%, the American workforce declined by another 183k.  The weak report was well received by markets based on the view that it gives the Fed more room to keep the pedal to the metal on quantitative easing.  Stay tuned for Wednesday’s Fed meeting announcement.
  • Consumer Confidence: The Reuter’s/University of Michigan consumer sentiment index posted a 73.2 reading for October, below forecasts of 74.8, as the expectations component continues to weaken, as consumers weigh the impact that the shutdown had on the economy, and concerns about the current job market.  Declining gas prices over the past month made the consumer a little more upbeat.
  • International Trade: The trade deficit was $-38.8 billion in August, below forecasts of $-40 billion, with exports declining by 0.1%, imports unchanged, and a slight increase in the nonpetroleum deficit.
  • Economic highlights for the week ahead:
    • Tuesday, 10/29/2013: PPI, Retail Sales, Case-Shiller HPI.
    • Wednesday, 10/30/2013: CPI, FOMC Meeting Announcement.
    • Thursday, 10/31/2013: Jobless Claims.
    • Friday, 11/01/2013: ISM Manufacturing Index.

Municipal market themes: California, Vallejo, Puerto Rico.

  • California: Last week’s $2.28 billion general obligation deal was very well received, as bonds have rallied approximately 10bps across the curve.  The refunding component is projected to save the State $122 million.
  • Vallejo: The formerly bankrupt city is coming to market with a $19 million water bond, its first post-bankruptcy deal, in order to refund $17.5 million in variable rate demand water bonds, due to JPMorgan Chase declining to extend the letter of credit.  The City did not miss any payments on the water bonds during bankruptcy due to the revenues securing the debt being separate and distinct from the City’s general fund.
  • Puerto Rico: Mutual funds with exposure to Puerto Rico are continuing to experience outflows, though prices have appeared to stabilize in the near term.  Some question if the outflows are more attributed to interest rate speculators, rather than credit risk speculators.  Bid lists for Puerto Rico debt seem to be lightening in relation to earlier in the year.  Regulators are looking into what kind of systemic risk Puerto Rico could have on the broader market.

This report is prepared for informational purposes only. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument or service.  Market prices and other data may be obtained from outside sources and is not warranted as to completeness or accuracy. Any comments, statements and/or recommendations made herein are subject to change without notice, and may not necessarily reflect those of Alamo Capital.  Past performance does not guarantee future results.  Alamo Capital has no affiliation with any political party. Investing involves risk. Consult with a Financial Professional for additional information to determine the suitability of this or any other financial product or issue as it relates to your particular situation.

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