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Economic Update

July 14, 2014

Economic themes: Portugal, Gaza, FOMC Minutes.

  • Portugal: Banco Espirito Santo’s parent company missed a payment on short-term debt, according to a statement from 7/08/2014, stoking concerns of the continued European debt crisis and the risk of contagion.  The lender subsequently sold a 4.99% stake to honor the debt obligations and margin calls.  The lender also replaced its CEO.  Portuguese sovereign debt has sold off by 20bps over the past 2 trading days.
  • Gaza: War drums are beating as an offensive against Gaza militants has now lasted a week.  Israel has been performing air strikes against Hamas sites and is considering a ground offensive in response to rocket attacks from the militant group.  Markets have effectively shrugged off the military actions, though an escalation could contribute to volatility.
  • FOMC minutes: In their latest release, the Fed detailed their intent to end the quantitative easing program around October, if the economy maintains its current health.  However, they detailed that continued accommodative monetary policy would be prudent to sustain growth.  Federal funds future contracts imply the short-term lending rate could increase in mid-2015,
  • Economic highlights for the week ahead:

o    Tuesday, 7/15/2014: Retail Sales.

o    Wednesday, 7/16/2014: PPI, Indl Production.

o    Thursday, 7/17/2014: Housing Starts, Jobless Claims.

Municipal market themes: Puerto Rico, California.

  • Puerto Rico: Standard & Poor’s followed suit with Moody’s and Fitch by downgrading Puerto Rico debt.  The move follows the Commonwealth’s decision to pass the Puerto Rico Public Corporation Debt Enforcement Act and a draw on PREPA reserves to make the 7/01/2014 debt service payment.  They cite capital market access and a weak economy as further concerns.  S&P maintained an investment grade rating on COFINA debt, “due to strong statutory provisions that still remain in place.”  The Commonwealth has announced a forecasted balanced budget for the upcoming fiscal year.
  • California: State Controller John Chiang announced that the State of California ended the 2013/14 fiscal year with a positive cash balance for the first time since 2007.  The State had previously used accounting gimmicks and intra-fund borrowing to pay its bills.  Revenue for the year beat forecasts by 2.1%, led by personal income and corporate taxes, though was held back by weak sales tax figures.


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