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Economic Update

June 29, 2015

Economic themes: Greece, Personal Income & Outlays, GDP, China.

  • Greece: The flight to quality rally among treasuries is on, and volatility is surging, as negotiations appear to have broken down between Greece and their creditors. It appears that Greece will miss the June 30, 2015 scheduled €1.7 billion payment to the IMF, which will withdraw emergency liquidity assistance, and they will vote on July 5th on a referendum of proposals needed to restore bailout aid.  In the meantime, the Greeks imposed capital controls this morning, closing banks until at least July 6th, limited ATM withdrawals to €60, and closed the stock market.  Former PIMCO executive Mohamed El-Erian sees an 85% chance of a “Grexit”.  Sovereign debt among the European PIGS (Portugal, Italy, Greece, and Spain) is plummeting, while German debt is surging.
  • Personal Income & Outlays: Personal income was up a strong 0.5% in May, and the consumer dipped into their savings, as personal outlays were up 0.9%. Strength was seen in automobiles and retail goods.  The PCE price index saw a nice bump, up 0.3% in May, though is only up 0.2% over the past year.  While it’s nice to see the consumer opening their wallets, it’s not doing enough to stimulate inflation.
  • GDP: The second revision of Q1 Gross Domestic Product came in line with expectations at -0.2%, due to the strong dollar, weak exports, strong imports, adverse winter weather, and a port strike. The GDP price index was unchanged, supporting the Fed doves.  Early estimates for the second quarter GDP growth are between 2-3% as the consumer gets back on track.
  • China: After more than doubling over the past year, the Shanghai Composite Index has entered a bear market, falling more than 20% since its June 12th close, with much of the losses occurring in the past two trading sessions. In response, the People’s Bank of China cut one-year deposit rates over the weekend, and regulators are contemplating suspending IPOs.
  • Economic highlights for the week ahead:
    • Tuesday, 6/30/2015: S&P Case Shiller, Greece IMF Payment
    • Wednesday, 7/01/2015: ISM Mfg Index, Puerto Rico Payment
    • Thursday, 7/02/2015: Employment Report

Municipal market themes: Puerto Rico.

  • Puerto Rico: In an interview with the New York Times over the weekend, Puerto Rico governor Alejandro Garcia Padilla stated, “The debt is not payable, there is no other option.”  Both the House and Senate have passed independent balanced budgets, and they are trying to work out the differences between the two before the beginning of the upcoming fiscal year, beginning July 1st.  The governor is scheduled to hold a press conference at 5pm ET after meeting with lawmakers, where some speculate he could ask bondholders to make concessions, which would most likely include an extension of maturities, and a reduction in interest rates, among other options.  Such a move would be consistent with the “Krueger Report,” a study released by former IMF and World Bank officials, indicating that such a bond exchange would be a realistic option.  The Commonwealth’s electricity provider, PREPA, is scheduled to make a debt service payment on July 1st, which some speculate will not be paid.  Creditors in the forbearance agreement believe the utility has sufficient funds to make the payment, though the question is if they would threaten to reprioritize pledged revenue, which would be a violation of bond covenants, and could send the utility into receivership.  Offerings on Puerto Rico debt are slightly weaker, though the bid side is substantially weaker this morning.  Hedge funds are standing ready to offer liquidity to the Commonwealth, however, perhaps not on the most agreeable of terms.

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