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Economic Update

October 6, 2014

Economic themes: Economy, Employment, International Trade, ISM Mfg, Housing.

  • Economy: The flight to quality rally in bonds was in full effect last week, with equity markets selling off in response to weakness in Europe, geopolitical turmoil, and the fear of potential consequences associated with the Fed raising interest rates too soon. Market participants are looking forward to earnings season, which will be kicked off by Alcoa on Wednesday.
  • Employment: Nonfarm payrolls increased by 248k in September, beating forecasts of a 215k increase, with the unemployment rate falling to 5.9%. Average hourly earnings were unchanged, maintaining the stagnant trend.  Strength was seen in business services, retail, goods-producing, construction, and mining sectors.  While the payroll increase was viewed positively, the lack of wage increases will give the Fed some room to remain accommodative.
  • International Trade: The trade deficit declined to -$40.1 billion in August, led by falling oil prices, with exports up 0.2%, and imports up 0.1%. The biggest takeaway from the report was how much consumers domestically and abroad are benefitting from declining oil prices.
  • ISM Manufacturing Index: The manufacturing sector is expanding at a slower rate than forecasts, with the ISM manufacturing index posting a 56.6 reading in September, compared to forecasts of 58. Weakness was seen in new and backlog orders, with strength seen in the production component.
  • S&P Case-Shiller HPI: Home prices fell by 0.5% in July, and are up 6.7% over the past year. Declines were led by Chicago and Minneapolis, with strength seen in Las Vegas.  The price declines are viewed as a negative for homeowners, but could provide a boost for sales.
  • Economic highlights for the week ahead:
    • Wednesday, 10/08/2014: FOMC Minutes.
    • Thursday, 10/09/2014: Jobless Claims.

Municipal market themes: Stockton, San Bernardino, Fresno.

  • Stockton: In an unprecedented move, U.S. Bankruptcy Judge Christopher Klein ruled in the Stockton bankruptcy confirmation hearing that CalPERS payments could be legally impaired in its plan of adjustment. The ruling is viewed as a positive tool to aid distressed municipalities, though Standard & Poor’s commented that they do not expect a large number of municipalities to subsequently file for bankruptcy, and they do not view the decision as a material benefit in terms of credit quality.  Fitch stated that while payments may not be cut under State law, they may be impaired under Federal law.  The next court date for the confirmation hearing is scheduled for 10/30/2014.
  • San Bernardino: The tentative deal between the City of San Bernardino and the Police Officers Union fell apart due to differing interpretations of the agreement. Due to a gag order, specifics were not given, though good faith negotiations are expected to continue.  The city has been the “slowpoke” of municipal bankruptcies after filing for Chapter 9 in July 2012, and has not yet presented a plan of adjustment.
  • Fresno: Moody’s Investors Service revised the rating on the City of Fresno to positive, while affirming the Baa1 issuer credit rating.  They stated that positive changes in the city’s economy, tax base, and real estate markets, matched with strong management practices, could contribute to an upgrade in the next few years.

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