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Economic Update

May 4, 2015

Economic themes: Fed, GDP, Europe, Factory Orders.

  • Fed: During last week’s meeting, the Federal Reserve acknowledged that the economy slowed over the winter due to “transitory factors,” job gains moderated, and there was still “underutilization of labor resources,” resulting in them maintaining the Federal Funds Rate between 0-0.25%. The outlook of a June rate increase is highly unlikely, and the Fed signaled a possible rate increase for later in the year, though they remain data dependent. Bill Gross made another call for the “supercycle” of bonds and stocks to come to an end.  He added that his previous calls were made too early.
  • GDP: The economy grew at a slower than forecasted pace in Q1, with Gross Domestic Product increasing by 0.2%, missing forecasts of 1% growth, and the GDP price index fell by 0.1%, compared to forecasts of 0.5% growth. A harsh winter back east, a strong dollar, weak exports, slowing consumer spending, low energy prices, and a port strike were among the leading factors in the figures.
  • Europe: European bonds ended a 15-month rally, with the 10-year German Bund selling off sharply to 0.4%, after touching 0.07% two weeks ago, as markets digest Europe’s latest quantitative easing program. Greece is continuing to work with creditors in order to receive another round of aid, with a decision due in 3 days in order to fund their next IMF payment.  Sticking points include pension reform, labor reform, and fiscal forecasts.  Markets are anticipating that they will work things out.
  • Factory Orders: Strong aircraft and vehicle sales helped increase factory orders by 2.1% in March, inline with forecasts, and ends 7 consecutive declines after the sector has been hit hard by the strong dollar and weakness in oil. Excluding transportation, the figure was up by 0.1%.
  • Economic highlights for the week ahead:
    • Tuesday, 5/5/2015: International Trade
    • Thursday, 5/7/2015: Jobless Claims
    • Friday, 5/8/2015: Employment

Municipal market themes: Puerto Rico.

  • Puerto Rico: In a blow to Governor Alejandro Garcia Padilla, the House of Representatives rejected a bill on April 30, 2015 to implement a value added tax in the Commonwealth. In his subsequent State of the Commonwealth speech, the Governor strived to quell fears of a debt default, pledged to work with creditors on viable solutions, and called for “sacrifice, responsibility, and austerity.”  He blamed the failed tax reform on the opposing New Progressive Party’s “selfishness and disloyalty.”   Expect proposals detailing spending cuts and economic reforms in the coming weeks.


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