November 3, 2014
Economic themes: Markets, ISM, Fed, GDP, Personal Income & Outlays, Housing.
- Markets: Trick or treat? Benchmark indexes hit record levels on Halloween as investors took the Bank of Japan’s stimulus, global growth prospects, and equity valuations into consideration. The S&P 500 is up 8.5% from its October 15th
- ISM: The Institute for Supply Management’s manufacturing index posted a 59 reading for October which was above the 56 forecasted. This was led by strength in new orders and production despite hold-backs by exports. The report emphasizes strength domestically, and weakness abroad.
- Fed: As expected, the FOMC announced the end of quantitative easing, and kept the Federal Funds Rate between 0 – 0.25% in their October meeting. The economy is expanding at a moderate pace and labor conditions have improved. They see low energy prices keeping inflation down even though there are price gains in other aspects of the economy. Maturing securities on the Fed’s balance sheet will continue to be rolled over.
- GDP: Gross Domestic Product in the third quarter increased by 3.5%, above forecasts of 3%. The increase was led by personal consumption expenditures, exports, and government spending, though held back by weakness in imports. The GDP price index was up 1.3% which was held back by weakness in energy prices. This should slow the Fed from raising the Federal Funds Rate.
- Personal Income & Outlays: As expected personal income increased by 0.2% in September. However, spending fell by 0.2%, compared to a forecast of an increase of 0.1%, due to lower automobile and gasoline sales. The price index increased by 0.1% on the month and is up 1.5% over the past year. This indicates sustained moderate growth.
- Housing: The S&P Case-Shiller home price index declined by 0.1% in August representing the 4th consecutive monthly decline. This is up 5.6% over the past year. The greatest weaknesses were seen in the Chicago, Minnesota, and Detroit markets. The price declines hurt many consumers’ balance sheets, though should provide a boost for home sales when matched with low mortgage rates and an improving job market.
Municipal market themes: Puerto Rico, Stockton.
- Puerto Rico: In a conference call on Thursday the Commonwealth announced a plan to increase oil taxes by 60% to help support the Highway and Transportation Authority (PRHTA) putting it on a path to self-sufficiency. The Puerto Rico Infrastructure Financing Authority (PRIFA) is planning to come to market with up to $2.9 billion in debt to repay the PRHTA’s debt with the government development bank and refinance bond anticipation notes. The PRIFA debt would not be subject to restructuring. The Commonwealth also noted on the conference call that the Electric and Power Authority has been benefitting from falling oil prices.
- Stockton: The bankrupt city’s confirmation hearing concluded on Thursday without a request to impair pensions, despite Judge Klein’s interpretation that they may be impaired under the basis that they would have a hard time recruiting and retaining workers.
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