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Economic Update

Week of January 19, 2015

Economic themes: Oil, Europe, China, PPI/CPI.

  • Oil: Crude fell approximately 4% on Tuesday, January 20, 2015, though was trading above last week’s lows as production in Iraq surged to a record. Saudi Arabia is leading the push to keep oil prices low, which is having dire impacts on other nations dependent on higher oil prices, resulting in the shutdown of hydraulic fracturing rigs across the United States and Canada.  In a recent report, the IMF cut global growth by 0.3% for 2015 and 2016. The United States was the lone bright spot, with the growth forecast raised 0.5% to 3.6% in 2015.  Low oil prices are expected to provide a modest short-term benefit globally, though they are concerned about the global economy’s “deepening long-term rut.”
  • Europe: In a defensive move, the Swiss Central Bank unexpectedly abandoned their currency peg to the Euro, which sent the currency up approximately 40% relative to the Euro. The move is expected to harm exports, weaken earnings, and has crushed some currency traders.  The full impacts are not expected to materialize for a few months, though some analysts compared the action to dropping a nuclear bomb.  Meanwhile, the European Central Bank announced a €60 billion quantitative easing program on Thursday, January 22, 2015, in order to boost inflation and incentivize investors to move into riskier asset classes.  France largely supports the QE program, where as Germany is lobbying for economic reforms.
  • China: GDP in the world’s second largest economy grew by 7.3% in the 4th quarter, beating forecasts of 7.2% growth, and marking the slowest growth since 1990. The Shanghai Composite index fell 8% yesterday as China strives to place limits on margin trading.
  • PPI/CPI: The Producer Price Index fell by 0.3% in December, and is up 1.1% annually, as lower energy costs brought prices down. Final demand goods fell 1.2%, marking the sixth consecutive decline, again, attributed to energy.  The Consumer Price Index declined by 0.4% in December, and is up 0.7% annually, again, attributed to energy.  All things considered, the Fed has plenty of room to be dovish, particularly with the announced QE program across the pond.

Municipal market themes: Puerto Rico, California Schools.

  • Puerto Rico: The Government Development Bank, which is awaiting a $2.2 billion loan repayment from the Highway and Transportation Authority, posted total net liquidity of $1.09 billion as of 12/31/2014, down from $1.55 billion as of 11/30/2014. On Thursday, January 15, 2015, Governor Padilla signed a bill to increase oil taxes by 66%, which is intended to provide security for the HTA refunding, though includes a rate cap.  S&P stated the revenue pledge is consistent with a rating higher than ‘B’, though the restructuring act gives cause for concern.
  • California Schools: Following the release of Governor Brown’s proposed 2015/16 budget, Fitch Ratings said it will benefit schools, as it includes paying down the final $1 billion of school funding deferrals. Overall, the proposed budget is balanced, and focuses on saving money, paying down debt, and investing in core needs.  He would also like to focus on pre-funding post-employment obligations, rather than the current pay-as-you-go system.

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