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Economic Update

April 20, 2015

Economic themes: China, CPI/PPI, Greece.

  • China: The world’s second largest economy cut the reserve requirement for banks by 1%, to 18.5%, in an effort to add liquidity to the financial system. The move follows the country posting Q1 GDP growth of 7%, the slowest in six years, amid weakness in housing and industrial activities.  Chinese equities have come under pressure though, as markets are responding to regulators placing restrictions on margin trading by banning umbrella trusts, which allowed more leverage than could be enabled by traditional brokerage financing.
  • CPI/PPI: The Consumer Price Index posted a 0.2% gain in March, led by strength in energy, though held back by weakness in food. The index is unchanged over the past year, after posting a 0.1% decline in February.  The Producer Price Index posted similar results in March, increasing by 0.2%, also due to strength in energy, and weakness in food.  While the figures were slightly stronger than forecasted, which scared markets, inflation remains very low, supporting the dovish opinions at the Fed.  The current equity bull market has been largely supported by an accommodative Fed and better than expected earnings.
  • Greece: The government issued a decree forcing local governments to transfer cash to their accounts at the central bank, “due to extremely urgent and unforeseen needs,” specifically in order to fund payments for salaries and debt payments to the IMF amid a cash crunch, which seems far from unforeseen. Greek bond prices fell in response, with the three year yielding over 28%.  Credit default swaps imply an 81% chance that Greece will fail on debt in the next five years, up from a 67% chance in early March.  On Friday, April 17, 2015 European leaders will review Greece’s progress on reforms, though it appears they will not have a plan put together by then.  Greece’s government is defiantly standing behind their electoral promises.
  • Economic highlights for the week ahead:
    • Wednesday, 4/22/2015: Existing Home Sales.
    • Thursday, 4/23/2015: Jobless Claims, New Home Sales.
    • Friday, 4/24/2014: Durable Goods.

Municipal market themes: PREPA, Daughters of Charity, CalPERS.

  • PREPA: Forbearing creditors for the Puerto Rico Electric Power Authority extended the forbearance agreement by another 15 days, as they are, “continuing conversations to find feasible solutions that will transform PREPA.” A response to the two plans proposed by the forbearing bondholders is expected on Friday, April 24, 2015, a meeting between the authority’s rate consultants and creditor advisors is scheduled for May 4, 2015, and a formal comprehensive plan is expected in mid-June, prior to the Authority’s $400 million July 1, 2015, debt service payment.  The Authority drew $8.8 million in reserves to cover their April 1, 2015 payment.
  • Daughters of Charity: After the distressed hospital network’s acquisition by Prime Health fell through due to “onerous and unprecedented conditions” placed by Attorney General Kamala Harris, Daughters has commenced workforce reductions and service modifications to make the network more appealing to potential buyers. At least six buyers are believed to be interested in all or part of the system.
  • CalPERS: Former San Jose Mayor Chuck Reed has put CalPERS back in his crosshairs, calling them “the biggest bully in California.” He has launched an initiative to enable local governments to negotiate defined benefit contracts to be sustainable for the long term and to empower local governments to make their own decisions independent from the State.

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