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Economic Update

August 31, 2015

  • Global Equities: After rebounding in the second half of last week, stock markets around the world are continuing to sell off on 8/31/2015, which has erased some $5 trillion in wealth since the Chinese devalued the yuan.  August is poised to become the worst month for stocks in four years, as the volatility index has surged by 115%.  Markets are assessing the probability of a Fed move along with the employment report coming out on 9/04/2015, which is likely to weigh heavily on it.
  • China: The Shanghai Composite Index finished the month of August and is down 12.5%, after falling 14% in July.  Besides the devaluation of the yuan, Chinese growth forecasts have been slashed during the month of August. The Chinese government has shown inconsistent intervention in markets, and they have implemented a “special campaign” accusing approximately 200 traders, journalists, and others of market destabilizing activities.  It is quite fascinating to watch a market that endures more government control, and less free market price discovery.
  • GDP: Gross Domestic Product for the second quarter increased by 3.7%, beating the forecasted rebound of 3.2% and is led by gains in consumer demand for durables such as vehicles and residential investment.  The GDP price index showed more inflation than other gauges, up 2.1%.  After a weak first quarter, hurt by adverse weather and a port strike, the second quarter came back stronger than expected. Although this probably will not have a huge impact on the Fed’s September rate decision.
  • Jackson Hole: While a multitude of issues were discussed among central bankers at the Jackson Hole Economic Symposium, a reigning theme was how central banks cannot steer inflation as well as they thought.  Headline inflation continues to lag in the 19-nation currency block of industrialized nations, despite global quantitative easing efforts, and there may be a weaker relationship between interest rates and inflation than previously perceived.
  • Personal Income/Outlays: Personal income increased by 0.4%, personal spending increased by 0.3% and the PCE price index was up 0.1% in July and up 0.3% over the past year.  Contrasting the GDP price index, the PCE price index is showing a significant lack of inflation attributed to weak energy prices.
  • Housing: The S&P Case-Shiller home price index fell by 0.1% in June yet is up 5% over the past year, led by strength along the west coast, though held back by weakness in the Midwest.  New home sales increased by 5.4% in July to a 507k pace, below a forecast of a 516k pace, though sales are up 26% over the past year, as prices have increased by 2%.  Supply remains low, and sellers seem to be giving some concessions to boost the pace of sales.  Pending home sales increased by 0.5% in July, as leading indicators imply moderate growth ahead for the sector.
  • Economic highlights for the week ahead:
    • Tuesday, 9/01/2015: ISM Mfg Index.
    • Thursday, 9/03/2015: International Trade, Jobless Claims.
    • Friday, 9/04/2015: Employment Report.

Municipal market themes: Puerto Rico.

  • Puerto Rico: The Commonwealth was scheduled to unveil a proposal to restructure $72 billion in debt on 9/01/2015; however they have delayed it until 9/08/2015, due to the possible impact of tropical storm Erika.  I’m not sure if anyone expected the proposal to be delivered on time, and we could be lucky to inevitably see it by 10/01/2015, based off of previous information releases.  We are also awaiting a restructuring proposal from PREPAs $9.4 billion in debt by Wednesday, which we are unsure if it will be delivered on time.  Failure to do so could send the utility into receivership.

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