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Economic Update

March 30, 2015

Economic themes: GDP, Personal Income and Outlays, China, Housing.

  • GDP: Q4 GDP growth came in unrevised at 2.2%, below forecasts of a revised 2.4% growth, with increases seen in final sales, though held back by weaker inventory figures. The GDP price index was unchanged as well, up 0.1% as forecasted and held back by weak food and energy prices.  While the figures imply soft growth and weak inflation, Federal Reserve Chair Janet Yellen stated that she expects interest rates in the US to rise this year, though at a “gradual” pace.
  • Personal Income and Outlays: Personal income increased by 0.4% in February and is up 4.5% over the past year. Consumer spending increased by 0.2% and is up 3.3% over the past year.  The core PCE price index posted a 0.1% gain, and is up 1.4% over the past year.  The growth in incomes was viewed as rather favorable, but corresponded with a slowdown in spending, which could be attributed to adverse winter weather and weak energy prices.  With the PCE price index continuing to lag, the Fed has some room to be dovish.
  • China: Peoples Bank of China governor Zhou Xiaochuan stated on Sunday that policy makers had to be “vigilant” against inflation, and implied they could use both interest rate and quantitative measures to stimulate inflation. Markets viewed the news very positively.  The PBOC has implemented two rate cuts since November, and reduced bank reserve requirements.
  • Housing: Pending home sales posted a sharp rebound in February, up 3.1%. Strength was seen in the West and Midwest regions.  Highlighting the report was an increase in first time home buyers to 29%, from 28%.  New home sales also posted a sharp rebound in February, to a 539k pace.  The gains pulled inventory down to 4.7 months.  Much of the rebound was attributed to a 4.8% drop in prices, which are still up 2.6% over the past year.
  • Economic highlights for the week ahead:
    • Tuesday, 3/31/2015: Case-Shiller HPI.
    • Wednesday, 4/01/2015: ISM Mfg Index.
    • Thursday, 4/02/2015: International Trade, Jobless Claims.
    • Friday, 4/03/2015: Employment Situation.

Municipal market themes: Puerto Rico.

  • Puerto Rico: A proposed constitutional amendment to the Commonwealth, which would enable a major debt restructuring, is not gaining any traction among the legislature. Puerto Rico’s constitution prioritizes paying bondholders first, and most legislators agree that the Commonwealth’s debt must be paid in full.  The administration has attempted to allow certain public corporations to restructure in an effort to protect general obligation bonds.  The Puerto Rico Electric Power Authority is expected to announce the results of ongoing negotiations with the forbearing bondholders, regarding a possible extension of their agreement, or the seizure of the authority.  Moody’s is forecasting a default on the $400mm July 1st debt service payment.  The forbearing bondholders have allegedly offered $2b in financing to PREPA, including $1.2 billion for a natural gas plant, based on a number of conditions including a rate increase.

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