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Economic Update

August 18, 2014

Economic themes: Geopolitical Risk, Jackson Hole, PPI, Industrial Production, Consumer Sentiment, Retail Sales

  • Geopolitical Risk: Despite Ukraine attacking an armed Russian convoy, the two sides met over the weekend to discuss a possible truce, as tensions appear to be easing.  In Iraq, Kurdish forces made progress against Islamic militants, as the U.S. continues air strikes in the region.  After a five day truce, the cease fire between Israelis and Palestinians is set to expire tonight.  A long term peace agreement does not seem imminent.  The reduction in global tensions, matched with hopes of interest rates staying low due to slowing economic data, propelled the S&P 500 to a 1.2% gain last week.
  • Jackson Hole: The Federal Reserve Bank of Kansas City will hold their annual symposium in Jackson Hole from August 21 – 23, 2014.  This year’s theme is titled “Re-Evaluating Labor Market Dynamics.”  If history is an indication, the symposium is likely to give insight into future policy shifts at the Fed.  With the “underutilization of labor resources,” in the current labor force, the market is anticipating an indication of interest rates remaining low for some time.
  • PPI: The Producer Price Index increased by 0.1% in July, in line with expectations and is up 1.7% over the past year, below the Fed’s preferred gauge of 2%.
  • Industrial Production: With manufacturing rebounding, industrial production increased by 0.4% in July, led by increases in durable goods; specifically automobiles and furniture.
  • Consumer Sentiment: The Reuters/University of Michigan’s consumer sentiment index declined to 79.2, compared to forecasts of 82.3, led by declines in the expectations component.  Strength was seen in the current conditions component, as the labor market has been improving and gas prices have been falling.
  • Retail Sales: Retail Sales were unchanged in July, below forecasts of a 0.2% increase, with weakness seen in general merchandise, home furnishings and automobiles.  Strength was seen in clothing, food & beverage, and sporting goods.
  • Economic highlights for the week ahead:

o    Tuesday, 8/19/14: CPI, Housing Starts.

o    Wednesday, 8/20/14: FOMC Minutes.

o    Thursday, 8/21/14: Jobless Claims, Existing Homes Sales.

Municipal market themes: PREPA, San Bernardino

  • PREPA: The Puerto Rico Electric Power Authority was able to extend its lines of credit again, under an agreement that will hire a restructuring chief by 9/08/14. The agreement has a five-year business plan to be completed by 12/15/14, it may use reserves to fund 1/01/15 debt service and deliver a debt restructuring plan by 3/02/15.

San Bernardino: The bankrupt city reached a tentative agreement with the San Bernardino Police Officers Association, though terms are currently confidential.  An agreement was reached with CalPERS back in June, though progress has not yet been made with the Firefighters Union regarding their pension contributions.

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