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Economic Update

June 1, 2015

Economic themes: Consumers, GDP, Manufacturing, Greece, China.

  • Consumers: Americans are trying something new – saving – incomes are up and spending is flat. Personal income increased by 0.4% in April, slightly beating forecasts of 0.3%, and consumer spending was flat, missing forecasts of a 0.2% increase.  The PCE price index was flat in April, and is up a modest 0.1% over the past year.  When matched with the most recent retail sales report, the consumer has been tight with their wallet, delaying prospects of the Fed increasing interest rates.
  • GDP: Gross Domestic Product growth for the first quarter was revised to -0.7%, from 0.2%, though beat forecasts of a revised -0.8%. Net exports were the biggest culprit, as imports surged 5.6% tied to the strong dollar, though weakness was also due to the port strike and adverse weather.  Early estimates for the second quarter were around 3%, although they have since been reduced to closer to 2% following weak consumer spending.
  • Manufacturing: The ISM manufacturing index posted a 52.5 reading for May, beating forecasts of 51.8, and indicating the sector is continuing to expand, led by gains in new orders, though held back by weakness in exports. Other areas showing improvement included employment, production, and back-log orders.  While the figure is not necessarily indicative of a strong manufacturing sector, it is stronger than many forecasted.
  • Greece: The European nation missed a self-imposed deadline on Sunday for releasing the next round of aid, as Prime Minister Tsipras referenced “absurd demands,” and “harsh punishment,” from its creditors, even though such demands and punishment are consistent with previous requirements for releasing aid. The biggest sticking points entail pension benefits and workers’ rights.  Greece has four IMF payments due this month totaling €1.6 billion, with the first €300 million due on Friday.  As has been the case, expect more kicking and screaming and an eleventh hour agreement being reached, further kicking the can down the road.
  • China: The manufacturing purchasing managers’ index posted a 50.2 reading for May, indicating a slight expansion. As the world’s second largest economy’s growth rate slows to below the government’s preferred 7% target, further accommodative monetary measures could be in store.
  • Economic highlights for the week ahead:
    • Wednesday, 6/03/15: International Trade
    • Friday, 6/05/15: Employment Report

Municipal market themes: Puerto Rico, PREPA, California Water.

  • Puerto Rico: As expected, Governor Padilla signed into law the tax bill increasing sales tax from 7% to 11.5%, which is projected to increase revenues by $1.2 billion, and paves the way to negotiate a long delayed $2.9 billion bond deal. The Commonwealth will continue to negotiate over the implementation of a value-added tax.
  • PREPA: The Commonwealth’s distressed utility is expected to present a plan of their own to creditors today. Options are certainly on the table, as a group of creditors had previously proposed $2 billion in financing.  More recently, a group including York Capital Management, NRG Energy, and ITC Holdings compiled a $3.5 billion proposal to build natural gas generators and sell the Commonwealth energy through a 30-year agreement, without addressing previously issued debt, or requiring new debt.  While there have been flurries of whispers of a debt moratorium and/or an extension of maturities, PREPA is focused on transforming the utility enterprise and reaching a fair agreement with creditors.
  • California Water: Moody’s Investors Service indicated that the approval of a non-binding agreement between the Orange County Water District and Poseidon Water, over a desalinization plant in Huntington Beach, is a credit positive. While desalinization plants in previous decades were less financially feasible, Moody’s believes the deal will increase water supply and reliability at a manageable cost.

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