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Economic Update

July 1, 2013

Economic themes: S&P500, Manufacturing, GDP, Consumer Sentiment, Housing

  • S&P 500: The equity index posted a 13% gain in the first half of 2013, the biggest first half gain since 1998, despite losing 1.5% in June.  Bulls believe the market has already priced in a rate increase and bad news gives them more fuel for a sustained low rate environment; whereas bears fear the potential for rate increases and the impacts from sequestration are more than the economic recovery can handle.
  • Manufacturing: The ISM Manufacturing Index posted a 50.9 reading in June, above estimates of 50.5, led by new orders and exports; with inventories, delivery times, and prices flat; and employment showing some weakness.  Manufacturing is sustaining slow growth, and may not help lead an economic recovery, though may not hold it back.
  • GDP: Growth for the first quarter was revised down to 1.8%, due to revisions in personal consumption.  Headline inflation came in at 1.2%.  Slow growth and weak inflation was viewed positively by equity markets as it gives the Fed more fuel to keep interest rates low.
  • Consumer Sentiment: The Reuter’s/University of Michigan consumer sentiment index posted an 84.1 reading in June, above estimates of 83, led by the expectations component, though held back by current conditions.
  • Housing: the S&P Case-Shiller HPI posted a 1.7% increase in April, and is up 12.1% year-over-year as weak inventory and the risk of rising interest rates is creating a “panic” among buyers.  New home sales shot up to a 476k pace in May, as builders are increasing supply.  The pending home sales index increased 6.7% in May to a 112.3 level, the highest since 2006, and is up 12.1% year-over-year.  Housing has led the economic recovery, and many are watching how the market will digest increasing rates.
  • Economic highlights for the week ahead:
    • Wednesday, 7/03/2013: International Trade.
    • Friday, 7/05/2013: Employment Situation.

Municipal market themes: June volume, Detroit, California.

  • June Volume: June new issue volume fell 46.5% from last year to $23.2 billion, and is down 11.5% for the first 6-months of the year, led by declines in refundings.  Investors have been fleeing bond funds with interest rates rising, resulting in new deals being postponed.  The municipal bond market lost 3.4% in Q2, the worst performance since Meredith Whitney’s infamous call in Q4 2010; with many industry veterans seeking buying opportunities on the basis the market went “too far too fast,” as demand has decreased. 
  • Detroit: The State of Michigan has announced it supports the Detroit Emergency Manager’s plan to treat general obligation bonds as unsecured debt, placing it on a parity basis with the City’s pension obligation bonds, and pension and healthcare benefits.  The Governor stated the City cannot make the payments, and cannot raise taxes anymore, as the population has been in decline for more than half of a century.  Such actions are likely to raise borrowing costs in relation to other states, and some say such actions could be viewed more poorly than a Chapter 9 filing.
  • California: Jerry Brown signed the $97.4 billion budget for the upcoming fiscal year, which includes $1.1 billion allocated to reserves.  It was viewed as a “momentous occasion” due to the lack of drama and political gamesmanship associated with the past decade of budgets.

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