July 21, 2014
Economic themes: Geopolitical Risk, Housing, Industrial Production, PPI, Retail Sales.
- Geopolitical Risk: Israel’s two week military offensive in the Gaza Strip has continued to escalate with both air and ground operations and death tolls rising. In eastern Ukraine, a Malaysian Airlines Boeing 777 was shot down in a pro-Russian controlled region, killing all 295 people on board, though nobody is claiming responsibility. The Volatility Index spiked to 14.54 following the event, from a low of 10.32 on 7/03/2014. EU ministers are meeting tomorrow to discuss whether further sanctions against Russian individuals and companies would be prudent to help quell violence in the region. The S&P 500, which has been supported by favorable Fed policies and good earnings results, will have 140 companies report Q2 earnings results this week, with forecasts calling for a 6.2% rise in earnings and a 3.3% rise in sales.
- Housing: Housing starts declined by 9.3% in June to an 893k unit pace, with declines in both the single-family and multifamily components, led by declines in the South region. Building permits fell by 4.2% in June to a 963k unit pace. The declines give the Fed a little more room to be accommodative.
- Industrial Production: The gauge increased by 0.2% in June, short of forecasts of a 0.4% increase, led by declines in motor vehicles and utilities, with strength seen in mining. While the sector continues to expand, it is showing some signs of volatility.
- PPI: The Producer Price Index increased by 0.4% in June and is up 1.9% over the past year, led by increases in energy costs, helping bring inflationary figures closer to the Fed’s preferred level.
- Retail Sales: Retail Sales increased by 0.2% in June, below forecasts of a 0.6% increase, led by declines in motor vehicles and building materials, with strength seen in general merchandise and health & personal care.
- Economic highlights for the week ahead:
o Tuesday, 7/22/2014: CPI, Existing Home Sales
o Thursday, 7/24/2014: Jobless Claims, New Home Sales
o Friday, 7/25/2014: Durable Goods Orders
Municipal market themes: Puerto Rico, California Water.
- Puerto Rico: In a conference call held last Thursday, Governor Padilla reiterated, “our commitment to honoring our financial responsibilities of the commonwealth remains unshaken.” They intend to overhaul their tax system to help balance the budget while encouraging economic growth, without offering specifics. The Commonwealth intends to issue tax and revenue anticipation notes by 9/30/2014, “as market conditions allow.” In a quarterly financial report released on Friday, the Commonwealth stated, “No public corporation has sought relief under the Recovery Act,” though, “in light of the Puerto Rico Electric Power Authority’s current liquidity constraints, however, PREPA may need to seek relief.”
- California Water: As a result of the extreme drought conditions, considered the driest on record, California has implemented water usage restrictions, effective August 1st. In response, Moody’s warned the restrictions could reduce sales and revenue for many water agencies.
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