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Economic Update

April 13, 2015

Economic themes: FOMC Minutes, Europe, China.

  • FOMC Minutes: In the release of the minutes from the Fed’s March meeting, policy makers were divided over whether or not to raise the Federal Funds Rate during the upcoming June meeting. However, the March jobs report had since been released, which showed the weakest growth since December 2013.  They also noted that inflation has been subdued due to weak energy prices and a strong dollar.  Add in pressure from foreign central banks participating in quantitative easing programs, slowing growth in China, and troubling Greek finances; all contribute to a difficult case to raise the Federal Funds Rate in June, let alone this year, though they remain data dependent.  The Fed next meets April 28-29, 2015.
  • Europe: Eurozone officials continue to pressure Greece for a detailed structural reform of their bailout program, with an outline due on Thursday, in preparation for an April 24, 2015 meeting where it will be decided whether or not the next €7.2 billion in aid will be released. Meanwhile, as the ECB continues their quantitative easing program, borrowing costs for the higher credit quality central banks continues to plummet.  Last week, Switzerland successfully sold 377.9 million Swiss Francs in 10-year debt at an unheard of -0.055%, the first time a government has ever sold 10-year debt at a negative yield. German 10-year debt is currently trading around 0.15%, with many predicting negative yields could also follow.  Such levels make the US 10-year look dirt cheap at 1.95%.
  • China: Exports in the world’s second largest economy fell 15% in March, and imports fell 12.7%, as demand appears to be waning. The figures are likely to contribute adversely to their upcoming Q1 GDP figure, scheduled to be released Wednesday, April 15, 2015.  Of course, though, since bad news is good news and good news is bad news, Chinese stocks rallied on the news as it is likely to encourage further stimulus.
  • Economic highlights for the week ahead:
    • Tuesday, 4/14/2015: PPI, Retail Sales.
    • Wednesday, 4/15/2015: Industrial Production.
    • Thursday, 4/16/2015: Housing Starts, Jobless Claims.
    • Friday, 4/17/2015: CPI, Consumer Sentiment.

Municipal market themes: PREPA, California Water. 

  • PREPA: The Puerto Rico Electric Power Authority’s chief restructuring officer, Lisa Donahue, stated that she is “optimistic” a deal will be made with forbearing bondholders, “that will allow the utility to operate efficiently and have a debt structure that will allow it to pay its debt as they come due.” Of course, the devil’s in the details.  The current agreement with the forbearing bondholders has been extended until April 15, 2015, though is likely to be extended further, as they work to figure out a $400 million July 1st debt service payment.  Bonds have rallied considerably on the news, though speculative investors may find relatively favorable values in other credits such as the Highway and Transportation Authority.
  • California Water: Following Governor Jerry Brown’s water usage mandate, Moody’s Investors Service stated that it would be a credit negative for water utilities. The mandate will make it challenging for some utilities to raise rates, and is likely to result in a decline in water sales.

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