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Economic Update

December 30, 2013

Economic themes: US Equities, Japan, Housing, Europe, Unemployment.

  • Equities: The S&P 500 is on pace to post a 29% return on the year, the best since 1997, as the index extended its rally in the wake of the Federal Reserve announcing plans to taper the quantitative easing program.  A survey from 20 economists by Bloomberg forecasted a gain of 5.9% in 2014.  The next debt ceiling debate is scheduled for February 7th, which should be interesting as always.
  • Japan: The Nikkei 225 is on pace to post a 57% return on the year, leading the 24 major developed equity markets and representing the best year since 1972.  The performance has been aided by 7 trillion yen ($66 billion) per month bond buying program designed to spur inflation.
  • Housing: Pending home sales rose 0.2% in November, the first monthly increase since June, but is down 1.6% year-over-year.  Would-be buyers have been discouraged by rising mortgage rates, weak supply, and higher prices.  New home sales fell by 2.1% in November to a 464k pace.  The year-over-year price is up 10.6% to $270.9k.
  • Europe: The European Central Bank President, Mario Draghi, stated he does not foresee reducing the bank’s main interest rate in the near term after it was cut to 0.25% a month ago.  He acknowledged that the European financial crisis is not over, but appeared to be optimistic with some economic recoveries taking hold across the region, improving budget deficits and falling trade imbalances.
  • Unemployment: With extended jobless benefits expiring Saturday, an estimated 1.3 million people lost their $300 per week benefit, which could reduce GDP growth by 0.2% in the first quarter.  A further extension would cost $25 billion.

Municipal market themes: Taxes, Sacramento Schools, Detroit, Chicago.

  • Taxes: Senate Finance Committee Chairman, Max Baucus, released a tax reform draft, and did not include language specific to limit or reduce the tax exempt status of municipal bonds.  With gridlock and turnover rampant in Washington at the moment, many do not believe major tax reform will be successfully accomplished in 2014.
  • Sacramento Schools: Fitch Ratings changed the outlook on the Sacramento Unified School District to negative, due to a failure to structurally balance its budget in 2014, weak financial oversight, and weak reserves.
  • Detroit:  The bankrupt city reached a new swap agreement, with the city paying banks $165 million, down from $200 million, as well as $4.2 million for terminating the swaps.
  • Illinois: The Illinois Retired Teachers Association filed a lawsuit questioning the constitutionality of Illinois’s recent pension overhaul plan.  A spokesman for the Governor’s office stated the legislation is constitutionally sound, and urgently needed.  The group of school officials would be well served to focus on how to make pension obligations sustainable for the long term and work within the available revenues.

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