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February 25, 2013

Economic themes: Sequestration, FOMC Minutes, Housing, PPI/CPI

  • Sequestration: The White House released a state-by-state report discussing how automatic spending cuts, set to hit on 3/01/2013, will impact each state.  Programs likely to bear the brunt of the cuts include military bases, military contractors, education, and health care.
  • FOMC Minutes: The release from the Fed meeting on January 29-30 meeting revealed a Q4 2012 slowdown that was largely attributed to weather, and expressed continued concern over the European debt crisis and the fiscal cliff debate.  Debate spurred around quantitative easing, whether to remain accommodative, or if the pace of purchases should be more varied.  The previously specific unemployment and inflation language was eased back.  Evidence of success in quantitative easing appears to be in interest rate sensitive sectors, such as housing and autos.
  • Housing: January housing starts eased back slightly to an 890k unit pace, down 8.5%, led by declines in the multifamily component, and slows in the Midwest region; though housing permits showed reason for optimism, increasing 1.8% to a 925k unit pace.  Existing home sales rose 0.4% to a 4.92 million unit pace, held back by weak supply, standing at 4.2 months, with the actual homes on the market at a 14 year low of 1.74 million units.
  • PPI/CPI: The Producer Price Index increased 0.2% in January led by rising food costs, though was held back by declining energy costs, and is up 1.4% year-over-year.  The Consumer Price Index was unchanged in January, and is up 1.6% year-over-year.  Expect increasing gas prices to play a factor in the February report.
  • Economic highlights for the week ahead:
    • Tuesday, 2/26/2013: S&P Case-Shiller Index, New Home Sales, Consumer Confidence.
    • Wednesday, 2/27/2013: Durable Goods Orders, Pending Home Sales.
    • Thursday, 2/28/2013: GDP, Jobless Claims.
    • Friday, 3/01/2013: Personal Income and Outlays, ISM Manufacturing Index.

Municipal market themes: California Schools, California spreads.

  • California Schools: Moody’s Investor Service stated the upcoming proposed California budget would be a credit positive for schools due to the first per-pupil increase in spending in five years.  The increase would be far short of the cuts to education over the past few years, but is a step in a positive direction of California continuing to live within its means.
  • California Spreads: With the large volume of new issuance scheduled in California, spreads of 30-year California State General Obligation bonds increased to +49 bps, from a low of +41 bps after being upgraded by Standard & Poor’s, though still notably below the average of +79.7 bps over the past year.

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