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Economic Update

April 14, 2014

Economic themes: Equities, Retail Sales, PPI, Consumer Sentiment, FOMC Minutes.

  • Equities: Domestic equity markets sold off last week, led by some of the better performing technology and biotechnology companies, creating some speculation that valuations were too high heading into earnings season.  Meanwhile, EU officials are considering further economic sanctions against Russia, for their perceived stoking of unrest in Ukraine, which could add to global volatility.
  • Retail Sales: The spring thaw was evident, as retail sales increased by 1.1% in March, above forecasts of 1%, with strength seen in automobiles, furniture, and building materials; and weakness seen in electronics and retail.
  • PPI: Some signs of inflation surfaced as the Producer Price Index increased by 0.5% in March, well above a forecasted increase of 0.1%, and is up 1.4% year-over-year, with the sharpest gains seen in food and services.
  • Consumer Sentiment: The Reuters/University of Michigan consumer sentiment index posted an 82.6 mid-April reading, the highest since July, with the expectations and current conditions component leading the way, though held back by rising gas prices.
  • FOMC Minutes: In its latest release, the Fed indicated they plan on maintaining accommodative monetary policy, though a measured tapering of its quantitative easing program is likely to continue.  The Federal Funds Rate is likely to remain very low for some time in order to stoke inflation, with the Federal Funds futures contracts implying a May 2015 rise.
  • Economic highlights for the week ahead:
    • Tuesday, 4/15/2014: CPI.
    • Wednesday, 4/16/2014: Housing Starts, Industrial Production.
    • Thursday, 4/17/2014: Jobless Claims.

Municipal market themes: Puerto Rico, Detroit, Hercules.

  • Puerto Rico: The Commonwealth elected to hire a restructuring advisor, Cleary Gottlieb Steen & Hamilton.  The new issue 8% bonds started reaching a new low, hitting 86 cents on the dollar late last week, though liquidity could be a cause as well, with nontraditional buyers in play. 
  • Detroit: The bankrupt city reached a deal with insured unlimited tax general obligation bondholders, allowing the city to divert 74 cents of pledged revenues.  The agreement is in stark contrast to the deal proposed by the emergency manager, which would have paid 15 cents on the dollar. 
  • Hercules: The Hercules municipal utility successfully closed their tender offer on the bonds, enabling the sale to PG&E.  The bonds were designed to have any potential shortfalls in debt service covered by the City’s general fund, though the distressed city did not have the resources, and the utility could not generate sufficient revenues to cover debt service.


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