January 5, 2015
Economic themes: Greece, Oil, Manufacturing, Housing.
- Greece: The Euro is hovering near a nine-year low relative to the dollar, as Greece is subject to snap elections after failing to elect a President. Investors fear that the anti-austerity Syriza party may be elected. The leader of the Syriza party, Alexis Tsipras, has openly stated he would end austerity measures, which would violate bailout covenants, and could result in Greece’s exit from the Euro zone. Expect more economic stimulus from the European Central Bank.
- Oil: Crude oil is touching new lows, amid reports of Russian production at a post-soviet record and Iraq announcing plans to increase exports by 10%. The decline marks a more than 50% move from the mid-summer 2014 highs.
- Manufacturing: The ISM manufacturing index posted a 55.5 reading for December, below forecasts of a 57.5 reading, with declines seen in new orders, backlog orders, and production. Strength was seen in employment. Input prices declined, largely due to the fall in oil and gasoline prices.
- Housing: The S&P Case-Shiller index increased by 0.8% in October, beating forecasts of a 0.6% increase, and is up 4.5% over the past year, with gains seen in the Atlanta, San Francisco, Tampa, and Denver regions. Pending home sales increased 0.8%, posting a 104.8 reading in November, this bodes well for housing going into the New Year.
- Economic highlights for the week ahead:
- Wednesday, 1/07/2015: International Trade, FOMC Minutes.
- Friday, 1/09/2015: Employment Report.
Municipal market themes: 2014, California Special Districts, California High Speed Rail.
- 2014: The municipal bond market posted gains every month in 2014, with the Barclays aggregate index posting an 8.71% gain on the year, compared to a 6.97% for investment grade corporates, and a 4.6% gain for Treasuries. The rally was led by $23.9 billion flowing into municipal bond mutual funds, which followed a $63.5 billion withdrawal in 2013, modest borrowing by austere local governments through the first three quarters, redemptions exceeding new issuance, and higher tax revenues, which have increased the credit quality of several issuers. The most significant gains were seen in California and Michigan, though held back by Puerto Rico and New Jersey. A SIFMA survey projects new issuance to increase by 2.7% in 2015. While the municipal market has many positives going into 2014, some remain concerned over inadequate funding of post-employment benefits, tax reform, and the potential for a rising interest rate environment.
- California Special Districts: California Controller John Chiang issued a report stating California needs greater oversight of their 4,800 special districts. He stated that they, “possess vast powers to tax, issue debt, and manage public resources … (and) can become breeding grounds for scandal and shockingly poor fiscal management.” He would like to focus on their formation, accountability, checks-and-balances, and reporting.
- California High Speed Rail: A groundbreaking ceremony will happen in Fresno on Tuesday for California’s $68 billion high speed railway. The controversial project has overcome several obstacles, including a multitude of lawsuits, to reach this phase of the project. Funding will come from state, federal, local, and private resources, including $8.6 billion in voter approved general obligation bonds.
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