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Economic Update

February 9, 2015

Economic themes: Europe, China, Employment, International Trade.

  • Europe: European stocks are under pressure following the Greek Prime Ministers’ Tsipras pledge over the weekend to reduce austerity measures by increasing the minimum wage, restoring the income tax-free threshold, and ending infrastructure privatization. He added that Greece would not accept an extension of the financial assistance program, spurring fears of an exit from the Eurozone.  An emergency meeting with creditors, who are wondering how Tsipras intends to fund his anti-austerity measures, is scheduled for 2/11/2015.  Talks of a ceasefire in Ukraine have escalated between Germany and Russia.  A summit is scheduled for 2/11/15.  Russia has stated that all sides must agree on positions prior to talks, and warned the U.S. and their allies against sending military aid to the region.
  • China: Chinese imports fell 3.3% in January, and exports fell 19.9%, due to declining commodity prices, resulting in a reduction of GDP growth forecasts to 7%, from the 7.4% growth rate in 2014. The decline in exports pushed the Chinese trade surplus to a record.
  • Employment: Nonfarm payrolls increased by 257k in January, beating forecasts of a 230k increase, with strong upward revisions for November and December. The unemployment rate increased slightly to 5.7%, as the labor force participation rate increased to 62.9%, from 62.7%.  Strength was seen in the goods producing, manufacturing, and construction sectors.  Increases to the minimum wage in certain states helped provide a 0.5% gain in average hourly earnings.  The report is a win for Fed hawks, as they may become more restrictive given the gains in employment.
  • International Trade: The December trade balance widened to $-46.6 billion, worse than forecasts of -$37.9 billion, due to low oil prices, as petroleum exports fell by 11.6%. The widening figure could reduce GDP forecasts, though strong demand for imports implies the consumer economy remains strong.
  • Economic highlights for the week ahead:
    • Thursday, 2/12/2015: Retail Sales.
    • Friday, 2/13/2015: Consumer Sentiment.

Municipal market themes: Puerto Rico, Stockton.

  • Puerto Rico: A restructuring law passed by the Commonwealth was thrown out in court due to a lawsuit from bondholders alleging the act was in irreconcilable conflict with Federal law. The law would have allowed public utilities to negotiate with bondholders to reduce debts, as they are not eligible for Chapter 9 or Chapter 11 bankruptcy.  The judge added that the Commonwealth could only impair contracts under reasonable and necessary measures.  Puerto Rico officials are reviewing the ruling, and are considering introducing a bill that would allow their public utilities to be included in Federal bankruptcy code.
  • Stockton: U.S. Bankruptcy Judge Christopher Klein released an opinion last week, reminding the city of Stockton that bankruptcy law gives them the ability to impair pensions, even though the city chose not to do so. In the opinion, he referred to CalPERS as, “a bully with an iron fist.”  The city’s exit from bankruptcy is pending an appeal from Franklin Advisors, who are scheduled to receive a recovery rate of approximately 1% on a $35 million certificate of participation bond.  They state the lack of impairment for CalPERS implies the exit plan was not designed in good faith.

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