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Economic Update

June 16, 2014

Economic themes: Geopolitical Risk, IMF, Industrial Production, PPI, Retail Sales.

  • Geopolitical Risk: Sunni Islamist insurgents have created an uprising across Iraq, stirring prospects of a civil war, and sending oil prices to their highest in nine months.  The U.S. is contemplating a coordinated response with its allies, which could even include Iran.  Ukraine is reporting that Russia may cut off natural gas supplies due to a failure to pay a $1.95 billion gas bill.  Gazprom has also filed a lawsuit to recover $4.5 billion in gas debt from Ukraine.
  • IMF: The International Monetary Fund reduced its expected growth rate for the U.S. economy this year to 2.0%, down from 2.8% in April.  They left 2015 growth rates unchanged at 3.0%, see full employment being reached toward the end of 2017 and think the Federal Funds Rate will remain near zero for longer than investors may expect.  Futures markets are currently pricing a move in June 2015.
  • Industrial Production: Manufacturing is showing some strength, as industrial production increased by 0.6% in May, above forecasts of a 0.5% increase and capacity utilization increased to 79.1%, helping give fuel to the Q2 GDP figure.
  • PPI: The Producer Price Index declined by 0.2%, below forecasts of a 0.1% increase and is up 2.0% over the past year.  Despite monthly volatility, the numbers support the Fed’s tapering schedule.
  • Retail Sales: Retail Sales posted a 0.3% increase in May, below expectations of a 0.6% increase, led by motor vehicle sales and building materials and held back by clothing.  With April numbers revised upward, retail sales are also boding well for the Q2 GDP figure.
  • Economic highlights for the week ahead:

o    Tuesday, 6/17/2014: CPI, Housing Starts.

o    Wednesday, 6/18/2014: FOMC Meeting Announcement.

o    Thursday, 6/19/2014: Jobless Claims.

Municipal market themes: Detroit, PREPA.

  • Detroit: Bankruptcy mediators announced a settlement has been reached with Detroit’s bankruptcy case, where the city’s limited tax general obligation bonds will have their unique status in the municipal market recognized, though details of the recovery rate have not been released.  Limited tax general obligation holders were originally offered 10-13% recovery rate, compared to 74% for the unlimited tax general obligation bonds.  The city’s confirmation hearing is scheduled to begin on 8/14/2014.
  • PREPA: Fitch downgraded the Puerto Rico Electric Power Authority to ‘BB’ citing liquidity and financial performance.  The rating is reflective of the Commonwealth’s, as the GDB could aid any liquidity concerns.  A recently passed electricity sector bill will focus on making electricity production more efficient and will have a commission to review rates.  PREPA is still ‘BBB’ rated by S&P.

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