March 3, 2014
Economic themes: Ukraine, GDP, Personal Income/Outlays, Manufacturing, Housing
- Ukraine: Vladimir Putin is beating his war drum, as Russia has threatened to invade Ukraine. Putin was granted approval from parliament to use military force to protect Russian citizens on the Crimean Peninsula in the wake of uprisings resulting in the ouster of Ukraine’s president. The West is viewing the move as an attempt to occupy the peninsula and is threatening economic sanctions. The military actions have globally sent stocks lower and a flight to quality rally in Treasuries.
- GDP: Fourth quarter gross domestic product was revised downward to 2.4%, slightly below the consensus of 2.5%. The sharpest downward revisions were seen in personal consumption expenditures, inventory investment, exports, and government spending, with nonresidential fixed investment revised upward. The price index increased 1.6%, above forecasts of 1.3%, although still below the Fed’s preferred rate of 2%.
- Personal Income and Outlays: In January, personal income increased by 0.3%, personal spending increased by 0.4%, and headline prices increased by 0.1%. A number of special factors were in play making the numbers less clear to interpret, including the expiration of certain unemployment benefits, impacts from the Affordable Care Act, cost-of-living adjustments and inclement weather.
- Manufacturing: The ISM Manufacturing index rebounded to a 53.2 reading in February, up from 51.3 in January. Weather continues to play a factor with sharp declines in shipping and supplier deliveries. Strength was seen in new orders, backlog orders, and inventories.
- Housing: Pending home sales increased by 0.1% in January, the first gain since May, but are down 9% year-over-year. New home sales increased 9.6% in January, as prices experienced a 2.2% decline, bringing supply down to 4.7 months. The S&P Case-Shiller Index increased 0.8% in December, and is up 13.4% year-over-year. The housing market continues to show strength with prices higher, supply down, mortgage rates well off their lows, employment weak and impacts from weather.
- Economic highlights for the week ahead:
- Thursday, 3/06/2014: Jobless Claims.
- Friday, 3/07/2014: Employment Situation, International Trade.
Municipal market highlights: Taxes, Detroit.
- Taxes: Representative Dave Camp proposed major tax reforms, which would, among other things, lower taxes for many, at the expense of many deductions, exemptions, and credits. There would be two personal income tax brackets at 10% and 25%, a 10% surtax on the wealthiest, corporate taxes would be reduced to 25% from 35%, 40% of long-term and capital gains taxes would be exempt, with the remainder taxed as ordinary income, and the child tax credit would be preserved. The proposal has received substantially negative feedback from both sides, as too many constituents and campaign financiers benefit under the current system.
- Detroit: Fitch Ratings downgraded Detroit’s water and sewer department three notches to junk status citing uncertainty surrounding the City’s bankruptcy and weak financial performance. While the city states it will strive to honor the enterprise level debt, it is a reminder that the bankrupt City could impair the bonds through a number of actions, including restructuring. Moody’s and S&P downgraded the bonds to junk back in July, prior to the Bankruptcy filing.
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