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Economic Update

August 3, 2015
Economic themes: Greece, Personal Income & Outlays, Commodities, Manufacturing, GDP, FOMC.

  • Greece: After being closed for the past five weeks, the Athens Stock Exchange reopened on Monday, August 3, 2015, and fell by 16%, after being down by as much as 23%, with several shares down 30% – the maximum currently allowed under capital controls. Prime Minister Tsipras continues to attempt to negotiate a third bailout, which is expected to reflect much of the referendum the Greek people voted against just one month ago, which could be a tough sell.  They are staying afloat via bridge financing from creditors, and some capital controls remain in place that restrict the functioning of the economy.  In the wake of austerity measures, GDP is expected to contract by 4% this year.
  • Personal Income & Outlays: Personal income increased by 0.4% in June, and is up 4.1% over the past year, led by the rents and transfers components, though held back by slowing wages. Consumer spending posted a 0.2% gain in June, and is up 3.4% over the past year, as vehicle sales slowed.  The PCE price index posted a 0.1% gain, and is up 1.3% over the past year, which will support the Fed doves’ arguments to delay a Federal Funds Rate increase.
  • Commodities: The Bloomberg Commodity Index has fallen by 12% since the end of June, and commodity dependent currencies have been plummeting including the Canadian dollar trading at its lowest level relative to the US$ since 2004, the Australian and New Zealand dollars trading at their lowest levels relative to the US$ since 2009, and the Russian ruble has fallen by 10% over the past month. The price declines were exacerbated by a report saying Chinese manufacturing slid to a 5-month low, bringing the Shanghai Composite Index to a three-week low.
  • Manufacturing: The ISM Manufacturing Index is expanding at a slower than expected pace, posting a 52.7 reading in July, below forecasts of 53.7, as weak employment and exports continue to drag the sector down. Strength, however, was seen in the new orders and production components.
  • GDP: Gross Domestic Product in the second quarter increased by 2.3%, below forecasts of a 2.9% increase, led by residential investment and personal consumption, though held back by Federal government spending and weak exports. The GDP price index posted a 2% increase, above forecasts of a 1.5% increase, and in line with the Feds preferred level.
  • FOMC: The first rate increase in 9-years is moving closer, though certainly not imminent. In their July meeting, the Federal Open Market Committee noted continued improvement to the labor market and the housing sector, though they would like to see further improvement.  A rate hike following the September meeting still has a 40% chance of happening, though the Fed remains data dependent, and may be hard pressed to act without more wage growth.

Municipal market themes: Puerto Rico, Chicago, San Bernardino

  • Puerto Rico: The Commonwealth did not allocate a $58 million appropriation for the Public Finance Corporation’s August 1st payment, though had until the end of the day to do so. The Governor’s office stated, “This payment will be made as we address how to restructure the government’s debt prospectively.”  Many are speculating that Puerto Rico is posturing for a debt deal, as a report released a week ago from former IMF officials indicated the Commonwealth could make the payment if they chose to.  Puerto Rico has stated their Working Group for Economic Recovery plans to draft a debt restructuring plan by October 1st.  Separately, the Government Development Bank and the Sales Tax Financing Corporation reported to have both made their August 1st  The economy is projected to contract by 1.2% this year.
  • Chicago: The Windy City still needs to cover a $754 million budget gap in fiscal 2016 to cover an operating deficit and higher pension contributions. The City is asking for a collaborative process where all voices will be heard, though the 800lb gorilla in the room appears to be the $20 billion in unfunded pension liabilities.  Many expect a steep property tax hike to close much of the shortfall.
  • San Bernardino: After three years, a bankruptcy exit still does not appear imminent for San Bernardino, as they continue their war with the firefighters union. Court hearings are scheduled through the end of October, with the next one occurring September 8th.  The City is looking into ways to outsource firefighting services, though the firefighters union is opposed to such efforts.  An initial offer to bondholders called for a recovery of $0.01/$1 on appropriation backed debt, which is being opposed.

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