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Economic Update

August 10, 2015

Economic themes: China, Greece, Employment, International Trade, Oil.

  • China: Chinese markets are beginning to understand how bad news can be good news, as many are speculating that the slowdown in China will cause the government to intervene with more stimulus measures. Exports plummeted by 8.3% for the world’s second largest economy in July, and imports fell by 8.1%, with much of the blame going toward weak global demand and a strong yuan.  The Chinese Central Bank has cut rates four times since November, with more likely on the way.
  • Greece: The Greek government moved one step closer to an €86 billion bailout deal as they agreed to a draft of “substantial” and “far reaching” reforms with creditors, without specifying details. Their next debt payment is due August 20th, and they need to have a new deal in place by then or they could risk defaulting.  As has been discussed, the people voted against such austerity measures in a referendum a month ago.
  • Employment: Non-farm payrolls increased by 215k in July, slightly beating forecasts of a 212k increase, and the unemployment rate held steady at 5.3%, as expected. Average hourly earnings ticked up 0.2% and are up 2.1% over the past year, showing hints of wage growth, and the labor participation rate stayed near a 32-year low at 62.6%.  The report increased odds of a September rate hike to 52%, from 38% a week ago.  Much will be dependent on August’s employment report, as further wage growth may be needed to support the September move.
  • International Trade: Petroleum imports increased more than expected, bringing the trade deficit to $43.8 billion, worse than forecasts of a $43 billion deficit. Exports were weaker than expected as demand for capital goods and industrial supplies declined, though strength was seen in the services sector.  The weak global demand demonstrated in the report bodes poorly for the manufacturing industry.
  • Oil: September future contracts are heading back toward the March lows, and contracts for later years are being hit even harder, as the global supply glut shows no signs of waning. Such news bodes poorly for energy exploration and production companies, and could cause a scale back in their long-term investment decisions.  Companies such as Diamondback Energy and Marathon Oil depend on $65 barrel oil to profitably increase production, though September contracts are hovering below $44.  With many companies borrowing capacity based on the value of their oil and gas reserves, their borrowing capacities could plummet, and capital spending could be constrained.  The market is still digesting the increase in supply from the shale oil boom in America.
  • Economic highlights for the week ahead:
    • Thursday, 8/13/2015: Retail Sales.
    • Friday, 8/14/2015: PPI, Industrial Production.

Municipal market themes: Puerto Rico.

  • Puerto Rico: The Commonwealth has opted to no longer set aside general obligation debt service requirements on a monthly basis, which highlights the near-term liquidity concerns. The GOs are constitutionally guaranteed and have a superior claim on revenues, which have others speculating as to what a claw back in revenues from other authorities may look like.  Revenues that could be subject to a claw back include excise taxes, hotel occupancy taxes, fuel taxes, and oil taxes. Puerto Rico’s revenues tend to be back loaded, and they have historically depended on TRANs to finance short term cash flow needs, however their lack of capital market access has led them to creative financing measures.  The Commonwealth is working to balance healthcare, education, and public safety needs, with the need to fund debt service payments.

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