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January 14, 2013

Economic themes: International Trade, Jobless Claims, Chicago Fed President, Chinese Economy.

  • International Trade: the trade deficit expanded more than expected in November to $-48.7 billion, from $-42.1 billion in October.  The Apple iPhone was a leading contributor to imports, followed by pharmaceuticals and autos.  Nonpetroleum exports were led by telecommunications, machines, aircrafts, autos, and gold.
  • Jobless Claims: despite a holiday week and the continued Hurricane Sandy impact, jobless claims rose slightly to 371k, and the less volatile 4-week moving average rose slightly to 366k, though this is notably below the early December readings.
  • Chicago Fed President: Charles Evans stated the Fed could put an end to its quantitative easing programs if 1-1.5 million jobs are created over the next 6 months, though he forecasts unemployment will not dip below 6.5% before 2015, confirming the implication that the Federal Funds Rate could stay near all-time lows for the next 2-3 years.
  • Chinese Economy: In efforts to increase foreign investment, the Chairman of the China Securities Regulatory Commission, Guo Shuqing, said China could boost quotas in an effort to attract long-term investors.
  • Economic highlights for the week ahead:
    • Tuesday, 1/15/2013: Producer Price Index, Retail Sales.
    • Wednesday, 1/16/2013: Consumer Price Index, Industrial Production.
    • Thursday, 1/17/2013: Housing Starts, Jobless Claims.
    • Friday, 1/18/2013: Consumer Sentiment.

Municipal market themes: California Budget, Illinois Pensions, Municipal Bond Taxation.

  • California Budget: Governor Jerry Brown released a balanced $98 billion general fund budget for the next fiscal year, aided by the passage of Proposition 30 in November.  The legislature is actively attempting to restore across-the-board cuts to programs including education, healthcare, social services, and courts, though Brown has strongly resisted such demands.
  • Illinois Pensions: Fitch has been the latest credit rating agency to put the State of Illinois on notice, stating they must reform their unsustainable pension system, or face a further downgrade.  Such action brings more attention to the viability of pension promises that may be impossible to fulfill.
  • Municipal bond taxation: With sequestration scheduled to trigger (again) in March, many are speculating about the future of tax exempt interest from municipal bonds.  Some have speculated there could be a retroactive 28% cap, which could risk triggering approximately $150 billion in mandatory redemptions, and severely increase state and local government borrowing costs.  While municipal bonds may be an easy target, the unintended consequences could be far more severe with minimal benefit, in relation to several other deficit reduction measures.

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