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Economic Update

August 26, 2013

Economic themes: Fed Jackson Hole, FOMC Minutes, Housing, Durable Goods.

  • Fed Jackson Hole: The Federal Reserve Bank of Kansas City held its annual Jackson Hole Economic Policy Symposium over the weekend, where central bankers, policy experts, and academics discussed long term themes in the economy and in monetary policy.  This year’s meeting focused on the unconventional monetary stimulus, how it was less effective than anticipated, the turmoil in emerging markets, the economic impacts, domestically and abroad, of a potential tapering, and how the Fed is primarily focused on U.S interest in the monetary policy debate.
  • FOMC Minutes: In the minutes from the latest meeting, the Fed remains data dependent, and will commence tapering if the economic recovery stays on track.  The Fed’s economic forecasts are rosier than many private economists.  Inflation remains low, and employment continues to show modest improvement.  Once tapering commences, it should be slow and gradual.  In an August 9-13th Bloomberg survey of economists, 65% believed that tapering will commence after the September 17-18th meeting.  Those supporting tapering believe the policy tool has been less effective than anticipated, that the recovery is on track, and potential asset bubbles have formed; those opposed believe that inflation is too low, employment growth has been too sluggish, and that the asset purchase programs will be justified by the economic benefit.  Many are eyeing the employment situation to be released 9/06/2013.
  • Housing: Existing home sales popped 6.5% in July to a 5.39 million annual pace, up 17.2% year-over-year, as a panic has ensued over rising interest rates, with prices unchanged from June, and are up 13.7% year-over-year.  On the other side of the spectrum, new home sales plummeted to a 394k pace in July, well below estimates of 487k, with prices down 0.5%, though up 8.3% year-over-year.
  • Durable Goods: New factory orders for durable goods fell 7.3% in July, led by the transportation component, attributed to a previous surge in aircraft orders.
  • Economic highlights for the week ahead:
    • Tuesday, 8/27/2013: S&P Case-Shiller HPI.
    • Wednesday, 8/28/2013: Pending Home Sales.
    • Thursday, 8/29/2013: GDP, Jobless Claims.
    • Friday, 8/30/2013: Personal Income and Outlays.

Municipal market themes: Yield Curve, California, Oakland.

  • Yield curve: With the steepening of the yield curve, Moody’s is speculating issuers will focus on the shorter-term issuances, and VRDNs.  Long-term investors could be well served by considering swapping shorter-term bonds, inside of five years, for bonds further out on the belly of the curve.  For example, based on the California St GO curve, a client could sell a 5-year bond, buy a 10-year bond, and pick up 183 bps! 
  • California: The State is preparing a $764 million general obligation competitive offering.  California has benefited from a balanced budget, an improving economy, and upgraded credit ratings, which should help the deal be very well received. 
  • Oakland: In a review of transfers from the former redevelopment agency to the city, California Controller John Chiang found that approximately $170 million were inappropriate, and should be remitted to the successor agency to help retire local debt, and fund essential services in Alameda County such as courts, schools, and public safety.  
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