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Economic Update

January 12, 2015

Economic themes: Oil, ECB, Employment, FOMC.

  • Oil: Crude was down as much as 4.5% on Monday, January 12, 2015, touching the lowest levels since April 2009, amid a supply gut. Goldman Sachs sharply cut their three-month price forecast to $42/barrel, from $80/barrel. They believe prices would need to stay low for a prolonged period to reduce production and keep capital sidelined.  Saudi Arabia, the world’s largest oil exporter, has stated they will not reduce supply to support prices, despite requests to do so from smaller OPEC participants, whose economies are dependent on higher oil prices.
  • ECB: As Europe heads into a deflationary environment, and the Euro fell to a nine-year low against the U.S. dollar. The European Central Bank is working on a sovereign debt purchase program, though some are questioning how effective it will be. The quantitative easing program in the U.S. could be remembered for how much it helped the wealthy, and how little it helped the middle class.  Details are expected to be announced during the next ECB meeting on January 22, 2015.
  • Employment: Nonfarm payrolls increased by 252k in December, beating forecasts of a 245k increase, and the unemployment rate fell to 5.6%. Average hourly earnings declined by 0.2%, weaker than forecasts of a 0.2% increase.  The payroll figures were viewed as a positive, but the rate of growth is slowing, the wage component lagged, and much of the fall in the unemployment rate was attributed to a declining labor participation rate.
  • FOMC: In the minutes from the December Fed meeting, much debate was had in regards to the first Federal Funds Rate hike. The decline in oil prices is slowing inflationary figures and could necessitate a rate increase prior to inflation exceeding 2%, though the Fed has room to be patient.  The economy is continuing to grow at a moderate pace, though deteriorating foreign economies are viewed as the most significant downside risk.  Employment is continuing to grow, but wages remain stagnant.
  • Economic highlights for the week ahead:
    • Wednesday, 1/14/2015: Retail Sales.
    • Thursday, 1/15/2015: Jobless Claims, PPI.
    • Friday, 1/16/2015: CPI, Industrial Production, Consumer Sentiment.

Municipal market themes: Daughters of Charity, San Bernardino.

  • Daughters of Charity: Officials at the Daughters of Charity Health System are fighting SEIU opposition of the sale to Prime Healthcare, stating their options are few. They contend the Prime offer was the only bidder that would maintain pensions, pay off debt, maintain services, and save jobs.  The SEIU is supporting a management agreement with private equity group, Blue Wolf Capital, based on Prime’s inadequate balance sheet, and concerns over whether or not Prime will be able to maintain their promises. Some claim the opposition is related to the SEIUs struggles with expanding membership into Prime’s hospitals.  Nuveen Investments, the largest holder of DOC debt, supports the sale to Prime.
  • San Bernardino: Bondholders from the bankrupt city are suing for equal treatment to CalPERS. They are citing a validation ruling specific to the Series 2005 pension obligation bonds, stating the POBs were similar to unfunded pension liabilities, as justification to not get voter approval to issue the debt.

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