July 13, 2015
Economic themes: Greece, Earnings Season, China, FOMC Minutes.
- Greece: We have an aGreekment! Well, maybe. After a 17 hour marathon negotiation session, Greece and their European creditors agreed to a deal to unlock €86 billion in aid over the next three years, contingent upon Greece passing critical creditor reforms including a value-added tax, a broadening of the tax base, and modifications to the pension system as well as an overhaul of the judicial system and placing €50 billion of state assets in a trust to be sold off. All of this to be done by July 15. More long-term creditor reforms will include further pension reforms, trade reforms, labor reforms, utility privatization, and a de-politicizing of the Greek administration. The Syriza party was elected in January 2015 to reject such measures, and the Greek people rejected such measures in a referendum vote a week ago, which could make the deal a tough sell to parliament.
- Earnings Season: 40 S&P 500 companies are scheduled to report this week, including Google, Wells Fargo, JP Morgan, and Intel. Forecasts for the index call for a 6.4% decline in profit, and a 1% rise in income. Revisions downward will make it easier for earnings to beat forecasts. Volatility in treasuries has increased due to headlines from Greece, China, and Puerto Rico, though also due to primary dealers cutting their treasury holdings to $9.3 billion from $20.8 billion for the week ended July 1, 2015 the second lowest in four years.
- China: The Shanghai Composite Index has rallied 13% over the past three days following unprecedented government intervention. Of the 2,800 companies in the index, 1,400 were halted the week of July 6, 2015, and 1,045 remain halted on Monday, July 13, 2015. Exports increased by 2.8% in June 2015, the first positive posting in 4-months, while imports declined by 6.1% over the same period, and are contributing to the sentiment that more accommodative central bank policies could be forthcoming.
- FOMC Minutes: During their June meeting, the Federal Open Market Committee “saw economic conditions as continuing to approach those consistent with warranting” an increase in the Federal Funds Rate, though they mentioned some concern if “economic growth was sufficiently strong.” They expressed uncertainty in regards to Greece, China, consumer confidence, exports, weak energy prices, weak inflation, and a strong dollar, though implied a rate increase this year is likely. Based on the dual mandate of employment and price stability, they might have a hard time raising rates this year unless employment reports demonstrate notable wage growth. They next meet July 28-29, 2015.
- Economic highlights for the week ahead:
- Tuesday, 7/14/2015: Retail Sales
- Wednesday, 7/15/2015: PPI, Industrial Production
- Friday, 7/17/2015: CPI, Housing Starts, Consumer Sentiment
Municipal market themes: Puerto Rico.
- Puerto Rico: The Commonwealth will be hosting an investor call on July 13, 2015 at Noon PT, available at http://www.gdbpr.com/documents/PRInvestorMeetingDetails.pdf. The path ahead remains very fluid, and this meeting is likely to summarize the findings of the Krueger Report. Options appear to be limited, as the current legal framework prohibits a Chapter 9 restructuring, however the report has hinted at being interested in a note exchange, and the Governor has suggested a debt payment moratorium. Oppenheimer has released a statement saying Puerto Rico’s existing debt loads are sustainable, and that they could adequately service the debt if they choose to. With each interested party’s competing agendas, any sort of attempt to restructure could get ugly, and take quite some time.
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