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June 24, 2013

Economic themes: Fed meeting, China, Euro, Housing, CPI.

  • Fed Meeting: After a two day meeting ended 6/19/2013, the Federal Open Market Committee decided to leave rates unchanged, with the Federal Funds target between 0 – 0.25%, maintained the 6.5% unemployment goal, so long as inflation stays below 2.5%, quantitative easing will continue at $85 billion per month, and characterized the economy as growing at a “moderate pace.”  Unemployment remains high, but improving, and inflation is running below their target.  Forecasts were revised slightly positively, and if matched, could lead to tapering as soon as September, which sent equity and fixed income markets into a tailspin.  Looking ahead, it is critical for investors to analyze whether the Fed is more concerned over lack of inflation, or potential economic and financial imbalances caused by accommodative monetary policy, as was reflected by the two dissenters.
  • China: Equities in the Asian nation entered a bear market today as concerns loom of a cash crunch in the banking sector, with non-performing loans increasing, though the People’s Bank of China thinks that liquidity is “overall at a reasonable level.”
  • Euro: Amid stalled negotiations over the weekend to establish a banking union, which was agreed upon a year ago, EU leaders will reconvene Wednesday, 6/26/2013, in an effort to calm sovereign debt market tremors.  They are working to determine which creditors will pay the price for failed banks, with the list of candidates including taxpayers, bondholders, and depositors.  Some suggest that Cyprus was a good model.
  • Housing: May housing starts increased 6.8% to a 914k unit pace, up 28.6% year-over-year, though below estimates of 955k.  Permits fell 3.1% in May to a 974k pace, inline with estimates.  Existing home sales increased 4.2% in May to a 5.18 million pace, with median prices up 15.4% year-over-year, and supply falling slightly to 5.1 months.
  • CPI: The consumer price index in May matched expectations with headline inflation up 0.1%, and up 1.4% year-over-year, below the Fed’s target rate of 2.0%, and well below the trigger rate of 2.5%.
  • Economic highlights for the week ahead:
    • Tuesday, 6/25/2013: Durable Goods Orders, New Home Sales, Case-Shiller HPI.
    • Wednesday, 6/26/2013: GDP.
    • Thursday, 6/27/2013: Jobless Claims, Personal Income and Outlays, Pending Home Sales.
    • Friday, 6/28/2013: Consumer Sentiment.

Municipal market statistics:

  • 30 year Cal GO’s are trading at 5% for the first time since December 2011.
  • In the past 7 days the 30yr AAA MMD scale has cheapened by 60 basis points. The 10 year and 30 year treasuries have cheapened by 50 and 30 basis points, respectively.
  • 2 weeks ago, municipal bonds funds saw weekly outflows of approximately $1.6 billion, which was the most since December 2012. Last week’s outflows increased to $2.2 billion.
  • Last week’s new issuance was only $3.79 billion because many deals were postponed due to market conditions. This week’s calendar shows $10.23 billion of issuance will put tremendous pressure on the secondary market.
  • In the past 40 days the municipal bond market has seen its biggest price drops since 2008 and is close to experiencing the biggest drop in prices since 2004.

 

Municipal market themes: Morgan Hill Redevelopment, F/ETCA, California Leaders.

  • Morgan Hill Redevelopment: The successor agency announced plans to refinance approximately $100mm of debt due to their letter of credit provider, Scotiabank, leaving the municipal credit enhancement business, and no other banks willing to step in.  The agency is seeking a validation judgment to establish the primacy of the statutory lien on pledged revenues, brought into question under ABX126, to ensure legislative changes cannot impact bondholders.  Monrovia, Dinuba, and Upland have been the only successor agencies to successfully achieve a refunding.
  • Foothill/Eastern Transportation Corridor Agency: the F/ETCA is working to refund $2.4 billion of senior lien revenue bonds, though is awaiting clearance from CDOT to sign an agreement to extend the agency’s management from 2040 to 2053.  The agency has been working on a debt restructuring that is more realistic with the long-term financial plan.
  • California Leaders: The California Citizens Compensation Commission, which was appointed by the governor and sets pay each year for statewide office holders, voted to increase pay for top officials and lawmakers by 5%.

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