September 8, 2014
Economic themes: Employment, Fed, International Trade, Geopolitical
- Employment: Nonfarm payrolls increased by 142k in August, short of a forecasted increase of 230k, with the unemployment rate falling 0.1% to 6.1%. No single variable is to blame for the weaker than expected report and the market has somewhat discounted it due to prospects of a favorable revision. Regardless, bad news is good news again as it gives the Fed more room to remain accommodative.
- Fed: The Federal Reserve continues to gauge the strength of the labor market, particularly following the weak August report, and we are awaiting the meeting announcement from their upcoming September 16th-17th meeting. Market participants are anticipating an additional $10 billion reduction in quantitative easing, with an end to the program to be announced following their October 29th meeting announcement. However, with the weak August employment report, there has been an increasing belief that the program will not end until after the December meeting. Federal Funds futures contracts remain unchanged, projecting a mid-2015 increase.
- International Trade: The trade deficit narrowed to -$40.5 billion in July due to a rise in exports. The deficit with China reached an all-time high of $30.9 billion, implying improved business sentiment and stronger consumer demand going into the holiday season. The favorable figure gives the Fed more room to restrict monetary policy.
- Geopolitical risk: The European Union is expected to increase sanctions against Russia this week, in response to the conflict in Ukraine, including restrictions on dual-use technologies, restrictions on Russian military companies from EU financing, and corporate restrictions on bank and oil companies. A cease fire was agreed on Friday, though both sides are reporting violations. President Obama intends to build a coalition of Arab nations to fight Islamic State militants, though they seem to want the U.S. to do most of the work, as many of their own people are financing and fighting on behalf of the Islamic State.
- Economic highlights for the week ahead:
- Thursday, 9/11/2014: Jobless Claims.
- Friday, 9/12/2014: Retail Sales, Consumer Sentiment.
Municipal market themes: PREPA, Daughters of Charity.
- PREPA: The Puerto Rico Electric Power Authority appointed Lisa Donahue to be the Chief Restructuring Officer. Donahue, a managing director in turnaround and restructuring at AlixPartners, brings 23-years of experience in business plan development, operational alignment, business transformation, cash management, cost reduction, negotiation, situational analysis, and debt restructuring. She has held leadership roles with energy companies including Calpine, Atlantic Power, and SemGroup. Her priorities are expected to make the enterprise viable for the long term, to reduce costs, and to make operations more efficient.
- Daughters of Charity: The Los Altos based multihospital system said it will begin reviewing the final seven bids beginning on September 12th, with a final decision anticipated this fall. The board will be evaluating the potential buyers’ abilities to update facilities, honor collective bargaining agreements, and the ability to close the sale quickly. The potential buyers have not been revealed due to a confidentiality agreement; however the local SEIU-UHW (Service Employees International Union – United Healthcare Workers West) has launched an aggressive offensive to block the sale to Prime Healthcare Services. Prime has responded by filing a lawsuit against them under the racketeering statute, which is generally reserved for organized criminal activities, including manipulation, corruption, and misleading practices.
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