July 15, 2013
Economic themes: Retail Sales, FOMC Minutes, PPI,
- Retail Sales: The consumer spent less than expected in June, as retail sales increased by 0.4%, below projections of 0.8%, led by autos and gasoline. Weak retail, building supplies, and food figures held the number back. The consumer is benefitting from job growth, improved balance sheets, and rising home and stock prices, though is remaining careful with discretionary funds as tax increases and sequestration weigh in.
- FOMC Minutes: In the statement released by the Federal Reserve for the June 18-19 meeting, they affirmed the Federal Funds Rate between 0 – 0.25%, and stated that the decision to change the asset purchase program will be before and separate from when they raise the Federal Funds Rate. Economic growth is continuing at a “moderate” pace, and they increased medium term growth forecasts, which are slightly more optimistic than many private economists. The amount and frequency of the asset purchase program will be dependent on their ongoing assessment of economic conditions. The doves remain concerned with low inflation, whereas the hawks are concerned about asset bubbles in interest rate sensitive sectors of the economy.
- PPI: The producer price index increased by 0.8% in June, above expectations of 0.5%, and is up 2.5% year-over-year, led by spikes in energy, gasoline, and automobiles, which gives ample fuel for Fed hawks.
- China: GDP in China increased at a 7.5% rate in the second quarter, inline with expectations, and below the first quarter rate of 7.7%. The statistics bureau believes the stability of the economy will help achieve its 7.5% growth rate, though economists are gauging the impacts potential economic reforms could have on growth.
- Economic highlights for the week ahead:
- Tuesday, 7/16/2013: CPI, Industrial Production.
- Wednesday, 7/17/2013: Housing Starts.
- Thursday, 7/18/2013: Jobless Claims.
Municipal market themes: California, CSU, High Grade vs. High Yield.
- California: Revenue for the 2012/13 fiscal year totaled $100.1 billion, exceeding estimates by $2.0 billion, led by a strong stock market, employment gains, economic expansion, and tax increases. Sacramento is using conservative revenue forecasts for the upcoming fiscal year, assuming revenues will be $3.2 billion less than projections from the nonpartisan Legislative Analyst’s Office.
- CSU: Leading up to an anticipated $244 million refunding deal, California State University was upgraded to ‘AA-’ from S&P, citing strong management, improved operating performance, good planning, and a stabilizing State funding environment.
- High Grade vs. High Yield: ‘AAA’ rated municipal credits have lost 2.3% year-to-date, compared to 3.3% for the broader municipal market, representing the first time in 5-years that high grade has beat high yield. The performance is reflective of investors piling into high yield over the last few years, which pushed the spread in relation to high grade to record lows.
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