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Economic Update

February 24, 2014

Economic themes: Fed Minutes, Housing, CPI, PPI.

  • Fed Minutes: In the latest release, the Fed minutes indicated there is some debate over the speed and timing of future tapering.  Some of the weak economic data over the past few weeks has been attributed to weather, which would encourage the current pace.  They restated their focus on employment and price stability, being sensitive to changing economic outlooks, and issuing appropriate forward guidance.  After slumping 5.8% since the January 15th peak on the S&P 500, the index is hovering back near all-time highs, and is also up 173% from the March 2009 lows.
  • Housing: Existing home sales fell 5.1% in January to a 4.62 million unit pace, with prices up 10.7%, and inventory up to 4.9 months.  High prices, weak inventories, foul weather, a soft job market, and higher mortgage rates are discouraging buyers.  All cash buyers represented 33% of sales, and first time home buyers represented 26%, which implies housing is being supported by investors.  Housing starts presented a similar picture, falling 16% to an 880k unit pace, and permits fell 5.4% to a 937k unit pace.
  • CPI: The headline Consumer Price Index increased by 0.1% in January, and is up 1.6% year-over-year.  Higher energy prices and housing led the increase, although offset by softness in vehicles and apparel.  Inflation continues to run below the Fed’s target rate of 2.0%.
  • PPI: The Producer Price Index increased 0.2% in January, and is up 1.2% year-over-year.  Food and energy helped lead higher prices.
  • Economic highlights for the week ahead:
    • Tuesday, 2/25/2014: S&P Case-Shiller HPI.
    • Wednesday, 2/26/2014: New Home Sales.
    • Thursday, 2/27/2014: Durable Goods Orders, Jobless Claims.
    • Friday. 2/28/2014: GDP, Consumer Sentiment.

Municipal market themes: Detroit, Vallejo, Puerto Rico.

  • Detroit: The bankrupt city filed its plan of adjustment on Friday, which included paying retiree pensions approximately 30%, and general obligation bond holders approximately 20%. The adjustment placed general obligation debt holders on a parity basis with unsecured creditors, which could make accessing the capital markets considerably more expensive.  Water and sewer bondholders are scheduled to be paid in full, although are being requested to waive call protection rights.  The city appears to be favoring politically popular pensions over legal documents.
  • Vallejo: Moody’s Investors Service issued a report stating San Bernardino and Stockton are likely to struggle financially post-bankruptcy, much like Vallejo, if they fail to overhaul their pension systems.  Pension and healthcare expenses are increasing faster than most forms of tax revenue, making it all the more challenging to provide essential services, and highlighting the importance of the Pension Reform Act of 2014.
  • Puerto Rico: The commonwealth held a webcast last week detailing recent credit accomplishments, liquidity, reforms, economic development, and a plan to come to market with approximately $3 billion in debt.  The success of the deal will be dependent on luring in a class of investors with a higher appetite for risk, such as hedge funds.

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