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Economic Update

July 7, 2014

Economic themes: Employment, Rate Speculation, International Trade, ISM.

  • Employment: Nonfarm payrolls increased by 288k in June, well above forecasts of a 211k increase. Unemployment rate ticked down to 6.1%.  The largest gains were seen in professional services and transportation.  The report implies that the economy could be stronger than previously perceived in the second quarter.
  • Rate Speculation: Goldman Sachs, JP Morgan, and the Bank of Tokyo have changed their forecast for an increase in the Federal Funds Rate from early 2016 to Q3 2015 following last week’s strong employment report.  Federal Funds Futures contracts indicate the move could come as soon as May 2015.  The volatility index (VIX) reached a seven-year low on Thursday, closing at 10.32.  The Q2 earnings season opens up this week, where Bloomberg forecasts believe profit among S&P 500 companies will increase by 5%.  Gains in the S&P 500 this year have been largely attributed to positive economic figures, and the belief that the Fed will keep interest rates low.
  • International Trade: The trade deficit fell to $44.4 billion in May, compared to a forecasted deficit of $45.1 billion, due to a rise in exports and a decline in the petroleum gap.  The boost to exports could increase GDP estimates for the second quarter.
  • ISM: The Institute for Supply Management’s manufacturing index posted a 55.3 reading for June, led by the new orders and production components.  Weakness was seen in the employment and backlog orders components.  The non-manufacturing index posted a 56 reading for June, also led by the new orders component.  The strength in new orders in both reports suggests that economic growth could accelerate.
  • Economic highlights for the week ahead:

o    Wednesday. 7/09/2014: FOMC Minutes.

o    Thursday, 7/10/2014: Jobless Claims.

Municipal market themes: Puerto Rico.

  • Puerto Rico: Following the passage of the Puerto Rico Corporations Debt Enforcement and Recovery Act, trading in Puerto Rico debt has been rather volatile.  Moody’s Investors Service reacted by applying wide sweeping downgrades to all Puerto Rico debt, and Standard & Poor’s placed the bonds on CreditWatch with negative implications.  Much of the volatility is attributed to the precedence established that could allow certain Puerto Rico public corporations to restructure, though no entity has done so yet.  Regardless, many Puerto Rico bonds continue to have specific pledged revenue streams, and have long-term value.  Oppenheimer and Franklin are continuing to pursue a lawsuit challenging the legislation, stating it is unconstitutional.

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