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May 20, 2013

Economic themes: S&P 500, Treasury values, Consumer Sentiment, CPI/PPI, Housing, Industrial Production.

  • S&P 500: The index has posted gains for four consecutive weeks (in the midst of a 5-year bull market) and continues to set new records.  Strong economic indicators, favorable consumer sentiment, corporate acquisitions, and Fed stimulus measures have helped lead the charge.  The levels beg the question, will the Fed take the foot off the gas due to rising equity and housing prices?
  • Treasuries: With 10-year and 30-year Treasuries selling off by approximately 30bps in May, Treasuries are the cheapest since the early 1990s, in relation to other sovereign debt, including Germany, UK, and Japan, according to a study from FTN Financial.  With slow growth, modest inflation, and a struggling middle class employment market, some believe the Fed will continue quantitative easing efforts, though rising asset prices may cause the Fed to slow their asset purchases.
  • Consumer Sentiment: The Reuter’s/University of Michigan’s consumer sentiment index posted a mid-month reading of 83.7 in May, well above estimates of 78, attributed to an improving job market and a lack of inflation, which could help stimulate consumer spending.
  • CPI/PPI: A decline in food and gas prices in April contributed to a 0.7% decline in the producer price index, and a 0.7% increase year-over-year.  Likewise, the consumer price index declined 0.4% in April, and is up 1.1% year-over-year, with increases found in housing, vehicles, and tobacco.
  • Housing:  Housing starts fell 16.5% in April to an 853k unit pace, led by declines in the multifamily component, though permits were up 14.3% to a 1.017 million unit pace.  The NAHB Housing Market Index posted a 44 reading in May, reflecting a soft spring for homebuilders, held down by buyer traffic and a lack of supply.
  • Economic highlights for the week ahead:
    • Wednesday, 5/22/2013: Existing Home Sales, FOMC Minutes.
    • Thursday, 5/23/2013: Jobless Claims, New Home Sales.
    • Friday, 5/24/2013: Durable Goods Orders.

Municipal market themes: California Budget, SJSU Study.

  • California Budget: Governor Jerry Brown reduced general fund spending for the upcoming fiscal year by $1.3 billion, even though April revenue came in $4.5 billion above estimates.  Impacts from sequestration and tax increases are expected to reduce overall revenues.
  • S&P: The ratings agency stated the revised budget is a “minor” credit positive for California.
  • SJSU Study: A study commissioned by the State Treasurer’s Office at San Jose State University found little chance of wide-sweeping defaults among California cities.  Treasurer Bill Lockyer believes the study will help provide an “early warning system” for financially distressed cities.  Results of the study, and lists of the healthiest and most distressed cities, according to the study, may be found at http://www.publicsectorcredit.org/ca.

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