August 25, 2014
Economic themes: Fed, Geopolitical, Housing, CPI.
- Fed: During her speech at the Jackson Hole symposium, Fed Chair Janet Yellen gave little to no change in her outlook on the U.S. economy. She gave credit for the gains made in the labor market since the economic downturn, though stated more progress must be made to be considered fully recovered. Her focus continues to be on employment and inflation, without giving specifics. Market anticipation is essentially unchanged, with a projected end to quantitative easing in October and Federal Funds Futures indicating a mid-2015 rise. A rate increase will likely be highly correlated with continued improvement to the economy. However, in the release of the Fed Minutes from the July meeting, they stated that employment was improving faster than anticipated, however the labor participation rate and wage growth remain weaker than preferred.
- Geopolitical: As tensions continue in the seven-week conflict along the Gaza strip, the Bank of Israel unexpectedly cut its short term interest rate for the second consecutive month to 0.25%, in efforts to boost a struggling economy. Russian and Ukrainian leaders are expected to meet tomorrow, as Russia prepares to send a second humanitarian aid convoy into eastern Ukraine. Russia was condemned by the international community for the first convoy, as it crossed the border without authorization. Islamic State fighters seized an air base in Syria, bringing the Raqqa province outside of Assad’s control. They may now shift their sights to seizing Aleppo. The Assad government has been soliciting the U.S. to perform airstrikes against Islamic fighters.
- Housing: Sales of new homes fell 2.4% in July to a 412k unit pace, with the median home price up 2.9% to $269.8k. Sales of existing homes increased by 2.4% in July to a 5.15 million unit pace, with the median price rising 0.4% to $222.9k, and supply holding steady at 5.5 months. Housing starts increased by 15.7% in July to a 1.093 million unit pace, with permits up 8.1% to 1.052 million units, both led by the multifamily component. Housing data remains volatile due to tight credit, slow wage growth, and supply-chain bottlenecks.
- CPI: The Consumer Price Index increased by 0.1% in July, and is up 2.0% in the past year, in line with the Fed’s preferred level. Gains were seen in shelter, medical care, vehicles, and apparel; with declines seen in airfare and tobacco.
- Economic highlights for the week ahead:
o Tuesday, 8/26/2014: Durable Goods Orders, S&P Case-Shiller HPI.
o Thursday, 8/28/2014: GDP, Pending Home Sales.
o Friday, 8/29/2014: Personal Income and Outlays.
Municipal market themes: Detroit.
- Detroit: The bankrupt city is scheduled to refinance $1.5 billion of water and sewer bonds this week, as part of a tender offer, with the objective of achieving $240 million in interest cost savings.
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