June 8, 2015
Economic themes: Employment, Europe, Asia, International Trade.
- Employment: Nonfarm payrolls increased by 280k in May, well ahead of forecasts of 220k, and the unemployment rate ticked up to 5.5%, as the labor participation rate increased to 62.9%. Average hourly earnings increased by 0.3%, the biggest monthly gain in 2 years, and are up 2.3% over the past year; however continue to lag the pre-recession average of 3.4%. When factoring the underemployed, the unemployment rate would be closer to 7%, meaning the economy would be approximately 2.5 million jobs away from full employment. While the report brings the possibility of a Federal Funds Rate hike back into the picture this year, it is doubtful it would happen before September at the earliest, and the International Monetary Fund recently encouraged the Fed to wait until the first half of 2016. The report capped off the worst weekly slide in Treasuries since February.
- Europe: G7 leaders are meeting in the Bavarian Alps to discuss global growth, climate change, trade agreements, militant groups, violence in Ukraine, and, of course, Greece. The leaders expressed interest in keeping Greece in the currency bloc, though are demanding immediate action from Greek leaders after they used a technicality to delay a €300 million payment to the IMF on Friday, June 5, 2015, and rejected an aid package that would have prevented an exit. Creditors appear to be getting fed up with the Greek’s negotiating tactics, saying that the Greek’s are misrepresenting the creditors positions, with Prime Minister Tsipras continuing to use words such as, “clearly unrealistic, absurd, irrational, and blackmail,” to refer to previously agreed upon conditions. Sticking points continue to be over labor and pension reforms, with many EU members balking at the prospect of financing Greek pensions that are more generous than their own.
- Asia: Chinese exports fell by 2.5% in May, representing the third consecutive monthly decline, and imports fell by 17.6%, making it less likely that the world’s second largest economy will attain their growth rate objective of 7%. In Japan, Q1 GDP growth came in at 3.9%, well above the preliminary reading of 2.4%, as strength was seen in capital spending, and exports to the US and China.
- International Trade: The trade gap eased to -$40.9 billion in April, compared to forecasts of -$44 billion, with imports falling by 3.3%, and exports increasing by 1%. The increase in exports reflected an increase in capital goods, led by civilian aircraft, autos, and industrial supplies. The decline in imports reflected weakness in consumer goods such as cell phones, apparel, and furniture.
- Economic highlights for the week ahead:
- Thursday, 6/11/15: Jobless Claims, Retail Sales
- Friday, 6/12/15: PPI, Consumer Sentiment
Municipal market themes: PREPA, San Bernardino.
- PREPA: The Puerto Rico Electric Power Authority’s creditors extended the forbearance agreement until June 18, 2015 as the negotiations continue going into the upcoming $416 million debt service payment on July 1, 2015 which Chief Restructuring Officer, Lisa Donahue, said, “there can be no assurance that the payment will be made.” Some creditors are becoming concerned that talks are progressing too slowly, and are seeking a resolution that will benefit all parties involved. Failure to advance talks prior to the end of the forbearance agreement could throw PREPA into receivership.
- San Bernardino: A recent ruling in the Bankrupt city’s Chapter 9 case is viewed as a credit negative, as it affirms San Bernardino’s plans to eliminate 99% of principal of the $48.4 million in pension obligation bonds, while honoring 100% of its unfunded pension liability. Creditors will have the opportunity to vote against the plan.
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