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Economic Update

June 15, 2015

Economic themes: Greece, Industrial Production, PPI, Consumer Sentiment, Retail Sales.

  • Greece: Talks between Greece and their European creditors to release the next €2 billion in aid broke down after 45 minutes on Sunday, as both sides dug their heels in deep. Simply put, to avoid a default, Greece must give up some concessions.  Markets had widely expected a solution, though the probability of Greece leaving the Euro currency bloc is certainly increasing, though remains low.  Euro Finance ministers will be having a call to discuss Greece on Tuesday, and will be holding a meeting in Luxembourg on Thursday, which some view as Greece’s last chance to avoid a default.  Prime Minister Alexis Tsipras stated his government is awaiting an invitation from creditors and is ready to respond anytime to continue negotiations.  He, “can only suspect political motives,” behind demands from Euro creditors to reduce pensions that are among the most generous in the Eurozone, and, “will wait patiently ‘til the institutions adhere to realism.”  Perhaps he should look in the mirror.
  • Industrial Production: After a weak first quarter, manufacturing has become weaker attributed to the strong dollar and weak exports, as industrial production fell by 0.2% in May, compared to forecasts of 0.2% growth. Capacity utilization fell to 78.1%, the lowest since January 2014.  Weakness was widespread, focused on consumer goods, construction supplies, and mining, with the strength seen in vehicles.
  • PPI: The producer price index increased by 0.5% in May, though is down 1.1% over the past year, led by surges in food and energy prices. Despite the May increase, inflation is continuing to run well below the Fed’s preferred gauge of 2%, and will mute the hawks calls for increases to the Federal Funds Rate during this week’s meeting.
  • Consumer Sentiment: The University of Michigan’s Consumer Sentiment surged to 94.6 in June, beating forecasts of 91.2, led by gains in the current conditions component due to an improved job market. The report serves as ammunition for the Fed hawks, though the consumer was held back by rising gas prices.
  • Retail Sales: The consumer is spending again as retail sales were up 1.2% in May, with gains across most components. Strength was seen in vehicles, energy, and building materials, with the weakest being the usually strong health and personal care component.  The report gives more fuel for the Fed hawks, though certainly will not be enough to cause a Federal Funds Rate increase during this week’s meeting.
  • Economic highlights for the week ahead:
    • Tuesday, 6/16/2015: Housing Starts.
    • Wednesday, 6/17/2015: FOMC Meeting Announcement.
    • Thursday, 6/18/2015: CPI, Jobless Claims.

Municipal market themes: Puerto Rico, Chicago.

  • Puerto Rico: The Commonwealth is working with insurers to guarantee a portion of a proposed $2.9 billion bond issuance that would help boost liquidity. The deal hinges on what kind of losses the insurers may be on the hook for in regards to PREPA, whose forbearance agreement is set to expire on 6/18/2015 if there is not another extension.  PREPA has submitted a restructuring plan that shares the pain among ratepayers, employees, bondholders, and management, though did not specify potential bondholder losses.
  • Chicago: The city will hold a hearing today where they will work to restructure $1 billion of short-term cash flow obligations to long-term debt, a costly habit frowned upon by many investors. They will also be seeking a decision on their pension funding, where a decision in favor of the city could tighten spreads, and a decision in favor of pension beneficiaries could widen spreads.

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