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Economic Update
August 12, 2013

Economic themes: S&P 500, Japanese GDP, EU GDP, China, International Trade

  • S&P 500: After advancing for six consecutive weeks, the S&P 500 fell 1.1% last week as investors weigh the probability of the Fed tapering bond purchases.  The index currently has a P/E ratio of 15.3, compared to an average of 13.9 over the past 5-years, and 13.1 in February.  The index is up 19% year-to-date as 72% of companies have beat earnings forecasts, and 56% have beat sales forecasts.
  • Japanese GDP: The economy in Japan grew at a slower pace than forecasts, as GDP grew 2.6% in the second quarter, below forecasts of 3.6%, and down from 3.8% in the first quarter.  Private consumption beat forecasts, which bodes well for the consumer, though the island nation continues to digest a weak currency and government stimulus.
  • EU GDP: Second quarter GDP in the European Union will be released on Wednesday, and is expected to have grown at a 0.2% pace, after shrinking for six consecutive quarters, as governments learn to live within their means, and residents slowly return to the work force.
  • China: Chinese industrial production increased by 9.7% in July, with inflation staying at 2.7%, giving some glimpse that China can transform from a capital and infrastructure growth oriented economy, to a consumer driven economy.
  • International Trade: As exports increased and imports dropped, the trade gap narrowed to -$34.2 billion in June, very favorable to the estimate of -$43 billion.  Larger than expected industrial supply and aircraft orders helped the export figure, though there’s some concern that the drop in imports could be reflective of weakening consumer demand.
  • Economic highlights for the week ahead:
    • Tuesday, 8/13/2013: Retail Sales.
    • Wednesday, 8/14/2013: PPI.
    • Thursday, 8/15/2013: CPI, Jobless Claims, Industrial Production.
    • Friday, 8/16/2013: Housing Starts, Consumer Sentiment.

Municipal market themes: California, Los Angeles Schools, Eminent domain

  • California: Fitch Ratings upgraded California GOs to ‘A’ from ‘A-’ citing improved fiscal management and a strong economic recovery.
  • Los Angeles Schools: As tablets prove to be a crucial educational tool, the LAUSD is planning a bond deal to finance iPads, with maturities consistent with the life of the product.
  • Eminent domain: The City of Richmond is proposing exercising eminent domain to help distressed homeowners, though mortgage bondholders are vehemently blocking such efforts as it could create worse than anticipated losses on certain distressed mortgage-backed securities.


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