April 28, 2014
Economic themes: Equities, Russia, Durable Goods, Housing, Consumer Sentiment.
- Russia: The U.S., together with the European Union, have placed economic sanctions on seven Russian individuals, and 17 Russian companies in the banking, energy, and infrastructure industries, in efforts to punish Vladimir Putin’s inner circle for their failure to address the Ukraine conflict in a diplomatic manner. Further sanctions are possible. S&P lowered the credit rating to BBB-, and the Russian central bank raised its key interest rate 50bps to 7.5% to tame inflation and maintains its value against a basket of other currencies. Vladimir Putin does not seem scared.
- Durable Goods: Orders increased by 2.6% in March, with nondefense aircraft and motor vehicles leading the way. After a slow winter, somewhat attributed to weather, the figures reflect an improving manufacturing sector, which could bode well for the upcoming GDP report.
- Housing: Pending home sales increased by 3.4% in March, well above expectations of 0.6%, and the first positive figure in nine months, led by the West and the South. Sales of existing homes in March fell by 0.2% to a 4.59 million pace, and are off 7.5% over the past year. In contrast to pending home sales, weakness was seen in the West and the South. New home sales fell a surprising 14.5% to a 384k pace. Prices seem to be the most significant hindrance, though weak supply, higher mortgage rates, and a tough job market seem to be factoring in as well.
- Consumer Sentiment: The Reuter’s/University of Michigan Consumer Sentiment Index for mid-April posted an 84.1 reading, above forecasts of 82.5, led by the current conditions component, and implies the job market could be strengthening. Increases in food and gas prices held the figure back.
- Economic highlights for the week ahead:
o Wednesday, 4/30/2014: GDP, FOMC Meeting Announcement.
o Thursday, 5/01/2014: Personal Income & Outlays, ISM Manufacturing, Jobless Claims.
o Friday, 5/02/2014: Employment Situation.
Municipal market themes: Puerto Rico, California Sales Tax, California Water.
- Puerto Rico: The Commonwealth’s economic activity index, which includes non-farm payrolls, electric power generation, gasoline consumption, and cement sales, increased by 0.6% in March. Continued economic expansion will be critical for the long term fiscal health of the island. Gov. Padilla will give his state of the Commonwealth speech on Tuesday, where he is expected to detail Puerto Rico’s Plan of Action for Growth and Competitiveness.
- California Sales Tax: Fitch released a report on 4/24/2014 detailing an uneven economic recovery in terms of sales tax revenues, with San Francisco, San Jose, and Bakersfield leading the post-recession growth among the State’s largest cities. 25% of the State’s largest cities continue to experience revenues below their pre-recession levels, including Oakland and Sacramento. The report implies that certain inland regions of the State could be recovering better than previously perceived.
- California Water: Agencies are planning the issuance of the first $200mm of a potential $25b in bonds under the Bay Delta Conservation Plan. Proceeds will be used to plan the construction of two 30 mile long tunnels designed to help move water from the northern Delta region to canals in the southern Delta, in a manner that does not disturb the fragile ecosystem. The current, and arguably dated system, pulls the water through pumps, which risks drawing salt water, and adversely impacting marshlands. The canals move water from northern California to southern California.
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