September 22, 2014
Economic themes: FOMC, Housing, CPI, PPI, Scotland.
• FOMC: The Fed announced at the end of their September meeting that they will reduce the quantitative easing program by an additional $10 billion, to $15 billion per month, with an end to the bond buying scheduled to be announced after the October meeting. It is believed they will continue to reinvest maturing securities. They reinforced the belief that the Federal Funds Rate will remain between 0 – 0.25% for “considerable time,” due to, “significant underutilization of labor resources.” Inflation continues to run below their preferred level, and I am under the opinion that notable wage growth will have to occur, which could stoke inflation, before we see a significant rise in the Federal Funds Rate. Fed Chair, Janet Yellen, has warned that rates could increase faster than the market perceives, however, there is not much evidence to believe that statement. Simply put, hardly anything new came out of the latest Fed meeting.
• Housing: Existing home sales unexpectedly fell 1.8% in August, to a 5.05 million unit pace, and are down 5.3% over the past year. Prices fell 0.8% for the month, are flat over the past six months, and are up 4.8% over the past year. Weakness was seen in the West and South, with modest gains in the Northeast and Midwest. Supply seems to be the most significant hindrance to sales, holding at 5.5 months, but also factoring in are a lack of first time homebuyers, a lack of distressed inventory, a reduction in investors, and a soft job market.
• CPI: Consumer prices fell by 0.2% in August, compared to forecasts of no change, led by declines in food, gas, and energy costs, though offset by gains in housing and new vehicles. The Consumer Price Index, the Fed’s preferred inflationary gauge, is up 1.7% over the past year, below the Fed’s 2% target level.
• PPI: Prices at the producer level were unchanged in August, in line with expectations, and are up 1.8% over the past year. Food and energy prices kept the index down.
• Scotland: The United Kingdom narrowly averted an “economic minefield,” as Scottish voters decided they should not be an independent country, by a vote of 55% to 45%. A yes vote could have devastated Scotland’s bond and currency markets as they do not have an established central bank, and several multi-national corporations would have most likely left due to the inherent uncertainty.
• Economic highlights for the week ahead:
o Wednesday, 9/24/2014: New Home Sales.
o Thursday, 9/25/2014: Durable Goods Orders, Jobless Claims.
o Friday, 9/26/2014: GDP, Consumer Sentiment.
Municipal market themes: Puerto Rico.
• Puerto Rico: In a review that commenced on July 1st, Moody’s Investors Service affirmed the Caa1 ratings on the Commonwealth’s Highway, Aqueduct, and Convention Center Bonds, and maintained their negative outlook. They stated the rating reflects adequate near term coverage of maturing debt, though preceded with caution regarding the debt restructuring law.
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