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Economic Update

December 15, 2014

Economic themes: Oil, U.S. Government, Industrial Production, PPI, Consumer Sentiment, Retail Sales.

  • Oil: Crude has sunk to its lowest level since July 2009. Over the weekend, the United Arab Emirates stated that the Organization of Petroleum Exporting Countries will not reduce output, even if prices were to fall to $40/barrel.  The current price levels have had somewhat dire consequences on oil dependent countries, as many depend on higher oil prices to balance their budgets.  The situation has been exacerbated for countries such as Russia and Iran, who are facing economic sanctions in addition to falling oil prices.  The current price levels have helped temper inflationary expectations, giving the Fed more fuel to be Dovish.  The Fed will be meeting 12/16/14 and 12/17/14, with a meeting announcement scheduled for 12/17/14 at 11:00AM PST.
  • S. Government: Whispers of a shutdown in Washington were quelled as the Senate approved a $1.1 trillion spending bill, funding the government through September 2015, with the exception of the Department of Homeland Security. Of note, the bill included a rollback of some Dodd-Frank banking reforms, as was requested by lobbyists from the banking sector.
  • Industrial Production: Manufacturing is showing strength, as industrial production increased by 1.3% in November, above forecasts of a 0.7% increase, and represents the largest increase since May 2010. Manufacturing posted a 1.1% increase, led by a rise in factory output.  The figures were more surprising following weak data overseas in Europe and Asia, fueling Fed hawk arguments.
  • PPI: The Producer Price Index fell by 0.2% in November, and is up by 1.4% over the past year. The decline was largely due to declining energy prices, which is expected to impact the CPI as well.  Chalk up another one for the Fed doves.
  • Consumer Sentiment: The Reuters/University of Michigan Consumer Sentiment Index posted a 93.8 mid-December reading, the strongest since January 2007, led by strength in the current conditions component. The consumer has been benefiting from an improving job market and low gasoline prices, which bodes well for the holiday shopping season.
  • Retail Sales: November retail sales increased by 0.7%, above forecasts of a 0.4% increase, with gains seen in auto sales. Gasoline sales held the figure back, which is aiding the consumer in spending in other areas.
  • Economic highlights for the week ahead:
    • Tuesday, 12/16/2014: Housing Starts.
    • Wednesday, 12/17/2014: FOMC Meeting Announcement, CPI.

Municipal market themes:  Puerto Rico, Stockton.

  • Puerto Rico: The Governor signed a bill increasing the Commonwealth’s oil taxes by 68%, which should aid the Infrastructure Financing Authority in issuing $2.9 billion in debt, with the hope to work with the legislative team on comprehensive tax reform. Sales and use taxes were up 9.5% in November, though general fund revenues declined by 0.7%.
  • Stockton: Franklin Advisors were denied their request for a higher claim in the Stockton bankruptcy process. The City offered them a 1% recovery on a $35 million certificate of participation, while CalPERS remains unimpaired.

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