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Economic Update

September 30, 2013

Economic themes: Washington, GDP, Personal Income and Outlays, Consumer Sentiment, Housing, Italy.

  • Washington: Political volatility continues.  Lawmakers have until midnight tonight to pass emergency legislation to avoid a government shutdown.  Republicans have a vast array of requests in regards to President Obama’s healthcare legislation, including delaying the legislation for a year, defunding, and making changes to suit their needs.  Democrats are standing firm.  Failure to act will likely cause a further selloff in equity markets, and could cause a flight to quality rally in treasuries, assuming investors do not lose faith in U.S. debt.  Next up is the debt ceiling debate, again, scheduled for October 17th.
  • GDP: In the third estimate, Q2 GDP was left unchanged at 2.5%, below expectations of 2.7%.  Revisions were fairly minor, with the most notable including inventory investment revised down, and nonresidential fixed investment and residential investment revised up.  Headline inflation was revised down to 0.6%, compared to a forecast of 0.8%.  Overall, it confirms there was moderate growth in Q2, but leaves all eyes on Q3 to see if it is continuing.
  • Personal Income and Outlays: Personal income increased 0.4%, consumer spending increased 0.3%, and headline inflation increased 0.1% in August, all in line with forecasts.  Year-over-year, headline inflation has increased 1.2%.  The figures imply some health in the consumer sector, though at a modest pace.
  • Consumer sentiment: The Reuter’s/University of Michigan consumer sentiment index posted a 77.5 figure for the final September reading, slightly below forecasts of 78.  The consumer does not seem to take the Washington turmoil seriously and has benefited from falling gas prices, though the current conditions component and economic indicators component imply some weakness from the mid-year gains.
  • Housing: Pending home sales for August fell by 1.6% to 107.7, the lowest since April, and is up 5.8% year-over-year as buyers face rising interest rates, rising prices, and weak inventories.  Separately, the new home sales report increased 7.9% in August to a 421k unit pace, as builders have softened prices.
  • Italy: Prime Minister Enrico Letta has requested a vote of confidence for Wednesday, in an effort to save the existing government and prevent new elections.  Over the weekend, Silvio Berlusconi withdrew his party’s support for the coalition, and there is internal debate over whether Berlusconi’s party supports his decision.
  • Economic highlights for the week ahead:
    • Tuesday, 10/01/2013: ISM MFG Index, Construction Spending.
    • Friday, 10/04/2013: Employment Situation.

Municipal market update: Puerto Rico, Oakland County, Stockton

  • Puerto Rico: UBS Puerto Rico is becoming subject to legislation due to alleged improper disclosures and deceptive information specific to leveraged closed end funds invested in Puerto Rico debt, that have lost significant value over the past several months.  It is a good reminder to always be aware of the risks of investments.
  • Oakland County Michigan: The contagion from Detroit’s Chapter 9 filing and corresponding treatment of general obligation debt continues as ‘AAA’ rated Oakland County just issued a private placement deal on a $350 million refunding citing timing, and issues with some neighboring municipalities in issuing debt.
  • Stockton: The bankrupt city has released a draft plan of its exit from bankruptcy, which will be taken up in a special meeting on 10/03.  Judge Chris Klein will decide the rights of creditors.

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