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Economic Update

May 26, 2015

Economic themes: Housing, Durable Goods, CPI, Greece, FOMC Minutes.

  • Housing: The residential real estate market is showing signs of new life. The S&P Case Shiller Index increased by 1% in March, beating forecasts of a 0.9% increase, and is up 5% over the past year, with broad based gains across all regions.  New homes sales posted a 6.8% increase in April to a 517k pace, led by gains in the large southern sector, helping supply fall to 4.8 months from 5.1 months.  Existing home sales was slightly weaker, falling 3.3% in April to a 5.04 million unit pace, below forecasts of a 5.22 million unit pace, but is still up 6.1% over the past year.  Declines were the strongest in the south, and supply increased to 5.3 months from 4.6 months, though prices surged 4.1% on the month to an 8.9% annual pace.
  • Durable Goods: New orders fell by 0.5% in April, due to a sharp decline in aircrafts, as expected, after very strong March figures. Strength was seen in machinery, fabricated metals and vehicles, and demonstrates strong improvement in the factory sector in the face of the strong dollar and associated struggling export market.  As has been the case, good news is bad news, as it increases the probability of a Fed rate hike.
  • CPI: The Consumer Price Index posted a 0.1% gain in April, inline with forecasts, and has fallen by 0.2% over the past year, largely due to weakness in the energy sector. Excluding energy, there are lingering signs of inflation due to relatively sharp increases in medical and shelter costs.  The report was a win for Fed hawks, as they finally have some evidence of inflation.
  • Greece: To the surprise of nobody, the left leaning anti-austerity Syriza party continues to stubbornly stand behind their absurd campaign promises, sending yields on Greek debt higher, the Euro to its lowest level in a month, and yields on German debt to the lowest levels in a week. The Greek Finance Minister is incorrectly blaming creditors on demanding further austerity measures, and Interior Minister Nikos Voutsis is accusing creditors of blackmailing them, both of which seem like public relation ploys.  Nobody seems very sympathetic, though as people expect some sort of solution to kick the can down the road ahead of the June IMF payment.
  • FOMC Minutes: Notes from the Fed’s April meeting revealed little new information, though a rate hike could theoretically occur at any meeting, data-dependent. They are seeing benefits across the economy from low interest rates and improving consumer sentiment.  First quarter weakness has been dismissed due to harsh weather back east, a dock strike, and weak energy prices.  They expressed concern and upcoming volatility, which they hope to offset via better communication.
  • Economic highlights for the week ahead:
    • Thursday, 5/28/15: Jobless Claims, Pending Home Sales
    • Friday, 5/29/15: GDP, Consumer Sentiment

Municipal market themes: Puerto Rico.

  • Puerto Rico: The Commonwealth’s Senate approved a bill that increases sales tax to 11.5% from 7%, following an amendment that excludes certain processed foods. The deal is expected to help balance a proposed $9.8 billion budget that needs to be approved by 6/30/15 to avert a government shutdown, and has helped Puerto Rico general obligation debt rally to a two-month high.  The Commonwealth has warned that without success of a proposed $2.9 billion highway and transportation deal, it could run out of cash around 9/30/15.


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