October 20, 2014
Economic themes: Market Volatility, Housing, Industrial Production, PPI, Retail Sales.
- Market Volatility: Markets have continued their more than 4-week risk on trade, as the S&P 500 has slid 6.2% since its 9/18/2014 peak. The 10-year Treasury has rallied 43 basis points since the 9/17/2014 low, as markets weigh the slowdown in Europe, the potential end of quantitative easing, Ebola, geopolitical risk, and earnings season. The volatility index declined to 20.2 on 10/20/2014, after reaching 26.25 last week. Corporate bonds have fluctuated in price by the most in more than a year, as primary dealers have reduced their net holdings by $1.7 billion over the past two weeks to a net $6.3 billion. Speculators had a record amount of bearish wagers against U.S. Treasuries last week, as prices rallied, with some unwinding their positions.
- Housing: Housing starts rebounded by 6.3% in September to a 1.017 million unit pace, up 17.8% over the past year, following a 12.8% slide in August. Much of the volatility has been attributed to the multifamily component. The NAHB (National Association of Home Builders) housing market index posted a 54 reading in October, below forecasts of 59, led by a decline in the traffic component, as first time homebuyers have been declining.
- Industrial Production: Good news continues out of manufacturing, as industrial production increased by 1% in September, above forecasts of a 0.4% increase. Beyond manufacturing, strength was seen in utilities and mining. Capacity utilization increased 0.6% to 79.3%.
- PPI: The Producer Price Index declined by 0.1% in September, and is up 1.6% over the past year. Food, energy, transportation, and warehousing led the index lower. The figures give the Fed some fuel to maintain quantitative easing.
- Retail Sales: The consumers slowed down in September, with retail sales declining 0.3%, led by weakness in automobiles, gasoline, and building materials. Strength was seen in food services, and electronics.
- Economic highlights for the week ahead:
- Tuesday, 10/21/2014: Existing Home Sales.
- Wednesday, 10/22/2014: CPI.
- Thursday, 10/23/2014: Jobless Claims.
- Friday, 10/24/2014: New Home Sales.
Municipal market themes: California Tobacco, San Joaquin Hills.
- California Tobacco: Kern County will bring a California County Tobacco Securitization Agency bond on 10/21, to refund the County’s Series 2002 bonds. The bond is structured to withstand a 7% annual decline in cigarette consumption. The bonds are secured by Kern County’s 1.01% share of California’s settlement under the master settlement agreement.
- San Joaquin Hills: The transportation corridor agency will be refinancing existing debt. Under the restructuring, the agency will have a more subtle increase in debt service requirements over the 2025 – 2035 periods, by extending the debt’s final maturity. Fitch assigned a BBB- rating on the senior debt, and a BB+ rating on the junior debt, reflecting debt service coverage of 1.41x and 1.22x respectively.
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