September 23, 2013
Economic themes: Fed, Washington, Housing, German Elections, China.
- Fed: The Federal Open Market Committee surprised some investors by maintaining their quantitative easing program, keeping bond purchases at $85 billion per month. With continued weak job growth, and near term inflation kept in check, the Fed did not have much room from an economic perspective to reduce the program, with the exception of some of the takeaways from the Jackson Hole Economic Symposium, where many debated how QE was having less of an impact than many had hoped. While QE has not been incredibly effective at helping the employment market, it has stimulated the housing, equity, automotive and other interest rate sensitive sectors of the economy.
- Washington: Political volatility in markets is back. President Obama and Congressional Republicans are threatening to hold the economy hostage yet again, as the House has threatened to deny an increase in the debt ceiling without the defunding of the President’s healthcare program. Many expect that any standoff will be short lived, but until there is a resolution, volatility could be increased. The art of politics is compromise.
- Housing: Existing home sales increased to a 5.48 million unit pace in August, well above estimates of 5.255 million units. The National Association of Realtors stated the numbers may have been impacted by investors rushing to lock in current mortgage rates based on the fear they could go higher. Inventory is down to 4.9 months. Housing starts increased 0.9% in August to an 891k unit pace, below estimates of a 915k unit pace. Economists are gauging demand as interest rates rise and inventories remain low.
- German elections: In yesterday’s election, Angela Merkel’s Christian Democratic bloc won 41.5% of the vote, though her allies failed to gain any seats in the lower house of parliament. Her party will work with coalition partners to form a government. Meanwhile, Eurozone PMI hit a 27 month high of 52.1, boosting hope the region is pulling out of the recession.
- China: The HSBC flash manufacturing PMI posted a 51.2 figure in August, representing a 6-month high, and implying the Chinese economy could be experiencing a more sustained recovery.
Municipal market themes: California Schools, Richmond
- California Schools: Fitch released a warning that California school districts remain “financially vulnerable,” despite increases in state funding, due to employment expenses increasing at a faster rate than tax revenues. California school districts have a unique array of mechanisms available to control expenses in the event they become unsustainable.
- Richmond, CA: Moody’s released a report stating that if Richmond proceeded with a proposed eminent domain plan to help underwater homeowners, then it would be a credit negative for the city. Essentially, it would likely reduce mortgage availability, limiting property values and related taxes.
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