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Economic Update

May 19, 2014

Economic themes: Treasuries, CPI/PPI, Industrial Production, Housing, Consumer Sentiment.

  • Treasuries: The 10-year treasury is hovering around 2.5%, the lowest yield in 6-months, though 95 bps more than non-US sovereign debt.  The flight to quality rally in treasuries reflects slow Q1 growth, unrest in Ukraine, a dovish Fed, and mixed economic data.
  • CPI/PPI: The Consumer Price Index increased by 0.3% in April, and is up 2% year-over-year, with notable price gains seen in food, energy, automobiles, and education.  The Producer Price Index increased by 0.6% in April, and is up 2.1% year-over-year, led by food, gasoline, and automobiles.  While some still blame a weather delay, the inflationary figures give the Fed some room to be more hawkish.
  • Industrial Production: After strong gains in February and March, Industrial Production declined by 0.6% in April, compared to forecasts of no change.  Declines were seen in manufacturing and utilities, with increases in mining and durables.
  • Housing: Housing starts beat forecasts, increasing by 13.2% in April to a 1.072 million unit pace, substantially led by the multifamily component.  The strongest regions included the Midwest and Northeast, both of which were heavily impacted by winter storms.
  • Consumer Sentiment: The Reuter’s/University of Michigan Consumer Sentiment Index posted an 81.8 reading in May, below forecasts of 84.5, dragged down by the current conditions and expectations components.  The job market is improving, and the stock market and housing market are near post recession highs, which should give the consumer more reason for optimism, though perhaps too few consumers participated in the growth.
  • Economic highlights for the week ahead:

o    Wednesday, 5/21/2014: FOMC Minutes.

o    Thursday, 5/22/2014: Jobless Claims, Existing Home Sales.

o    Friday, 5/23/2014: New Home Sales.

Municipal market highlights: Detroit, Stockton, California.

  • Detroit: A group of bondholders are challenging the bankrupt city’s proposal to pay limited-tax general obligation bond holders 10-13% of what is owed, compared to 74% for unlimited tax general obligation holders.  While the $163 million in debt is relatively modest compared to the city’s $11 billion in outstanding liabilities, such a settlement would be quite precedent setting.  A group, including Ambac and Blackrock, is leading the challenge.
  • Stockton: The city’s confirmation hearing, originally scheduled to conclude last week, will be extended until June 4th, due to Franklin Advisors’ objection to the proposed $94k settlement on $35 million of their lease revenue debt.  The primary point of contention is the city’s choice to leave pension holders unimpaired.  Pension treatment has become a rather focal point of municipal bankruptcy proceedings.
  • California: Gov. Jerry Brown’s proposed budget for the upcoming fiscal year includes $11 billion to pay down the state’s “wall of debt,” and to have the state’s intrafund borrowing paid off by the 2017/18 fiscal year.  Other notable changes include $1.6 billion to a “rainy day fund,” paying off $1.6 billion in economic recovery bonds, funding an emergency drought fund, and increasing healthcare and education funding.

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