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Economic Update

March 24, 2014

Economic themes: Manufacturing, FOMC, Housing, CPI.

  • Manufacturing: The PMI Manufacturing Flash Index posted a 55.5 reading in mid-March, below a forecast of 56.9.  Strength was seen in the new orders and output components.  After a weather impacted January, February posted solid numbers, and while not as strong as February, March is demonstrating solid growth.
  • FOMC: The Fed announced they will taper the quantitative easing program by $10 billion in April, to $55 billion per month, and kept the Federal Funds Rate between 0 – 0.25%, as expected.  Futures contracts imply an increase in the Federal Funds Rate could occur in early 2015.  The Fed remains data dependent, and they reiterated their focus on employment and inflation, though dropped the specific 6.5% unemployment target rate in favor of seeking a substantial improvement in the labor market.  Much of the winter weakness appears to be blamed on weather.
  • Housing: Existing home sales fell by 0.4%, to a 4.6 million unit pace in February, representing the sixth decline in seven months, and fell 7.1% year-over-year.  The 9.1% year-over-year price increase, and a weak job market, have slowed buyers.  Strength was seen in the West and the South, with weakness in the Northeast and Midwest.  Housing starts fell 0.2% to a 907k unit pace in February, with permits increasing 7.7% to a 1.018 million unit pace, led by the multifamily component.
  • CPI: The consumer price index increased by 0.1% in February, and is up 1.1% year-over-year, with gas and energy prices down, and housing and healthcare up.
  • Economic highlights for the week ahead:
    • Tuesday, 3/25/2014: S&P Case-Shiller, New Home Sales.
    • Wednesday, 3/26/2014: Durable Goods Orders.
    • Thursday, 3/27/2014: GDP, Jobless Claims.
    • Friday, 3/28/2014: Personal Income and Outlays, Consumer Sentiment.

Municipal market themes: California Pensions, Puerto Rico, Detroit.

  • California Pensions: Moody’s released a report on March 20, 2014, stating the delay of the Pension Reform Act of 2014 will be credit negative for local governments in California, as many face pension obligations that are growing at a faster pace than most forms of revenue.  San Jose Mayor Chuck Reed is now aiming to get the measure on the 2016 ballot.
  • Puerto Rico: FINRA is examining an estimated 100 transactions of the new issue Puerto Rico general obligation bond, which were executed in denominations of less than the 100k minimum, in violation of MSRB Rule G-15.  The minimum denomination rule on the new issue is in place so long as the Commonwealth carries a below investment grade rating, and is designed to prevent retail investors who may not adequately understand the risk from participating.  The 8% coupon bond due in 2035, was originally priced at $93, traded up after issuance due to being oversubscribed, and is now being offered below the issue price.
  • Detroit: The counterparties of Detroit’s controversial swap agreement, UBS AG and Merrill Lynch, filed a 1,701-page document with the bankruptcy court, stating they are a legally secured creditor, and warned litigation could be costly under the current proposal.  Detroit’s current proposal would pay the counterparties $85 million to terminate the swap agreements, which would release casino revenue as collateral, and represents a 70% discount of terminating the swaps, estimated at $288 million.

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