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Economic Update

February 2, 2015

Economic themes: Personal Income & Outlays, ISM, Greece, GDP, Fed.

  • Personal Income & Outlays: Personal income increased by 0.3% in December and is up 4.6% over the past year. Personal spending fell 0.3% in December, and is up 3.6% over the past year.  Inflation fell 0.2% on the month, and is up 0.7% over the past year.  Consumers are showing signs of strength, and have been benefitting from declining oil prices, while prices give the Fed plenty of room to remain dovish.
  • ISM: The ISM manufacturing index posted a 53.5 reading in January, below forecasts of 54.5, due to a sharp decline in new orders and weak foreign demand. The sector is benefitting from a strong domestic consumer, though is fighting weak exports and slowdowns in the oil sector.
  • Greece: New Prime Minister, Alexis Tsipras, has worked to calm investors by pledging to maintain financial obligations, and is seeking anti-austerity allies among European policy makers that may support a debt write-down. He is not finding many write-down supporters and some are concerned the new government is operating independent of reality, as they believe they can raise revenues through taxing the rich and reducing corruption.  The new government believes the policies over the past four years have been “ineffective,” though they need to conduct a successful capital raise by a self-imposed May deadline.
  • GDP: Fourth quarter Gross Domestic Product increased by 2.6%, below forecasts of a 3.2% increase. Strength was seen in personal consumption, local government spending, and residential investment.  Offsetting factors included weak Federal government spending and exports.  The price index was unchanged on the quarter, and is up 1.4% over the past year, again, giving the Fed plenty of room to be dovish.
  • Fed: The Federal Open Market Committee left the Federal Funds Rate unchanged, between 0 – 0.25%, as expected. The economy continues to improve at a “solid” pace, and the labor market has “improved further”.  Inflation remains weak, though they continue to expect it to “rise gradually” to their preferred gauge of 2%.  They feel they can stay “patient” in normalizing monetary policy, however notable improvements in the labor market could change that stance.  They remain data dependent.
  • Economic highlights for the week ahead:
    • Thursday, 2/05/2015: International Trade, Jobless Claims.
    • Friday, 2/06/2015: Employment Situation.

Municipal market themes: Puerto Rico, Kern County.

  • Puerto Rico: The Commonwealth is working with Assured Guaranty and National Public Finance Guaranty Corp to insure up to $500 million of a planned $2 billion Highway and Transportation Authority’s debt issuance. It is believed the insured component of the deal would bear a coupon of 5%.  While some argue the insurers would prefer to not be involved, it would aid in protecting their existing exposure.
  • Kern County: In response to a projected shortfall in revenue tied to property taxes from oil companies, Kern County declared a fiscal emergency.  Approximately one third of county property taxes come from oil companies.  The move grants them access to additional reserves, and improves employment flexibility.  Moody’s Investors Service responded by placing the County’s $86 million in certificates of participation’s A1 rating under review for a downgrade.

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