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Economic Update

September 21, 2015

Economic themes: Fed, Greece, Housing.

  • Fed: The Federal Reserve decided to leave the Federal Funds Rate unchanged after their September meeting, citing uncertainty with China, and global events that could “restrain” economic activity. They recognized improvement in the employment market and expect inflation to remain low in the near term, though are optimistic it will move toward their preferred 2% level over the medium term.  A rate move will be contingent upon “further improvement” in the labor market, and inflation closer to their preferred level.  Some Fed policy makers believe the Fed could still raise rates this year, though such a move would be rather gradual.  Fed futures contracts indicate a 20% chance of an October rate increase, and a 49% chance of a rate increase by December.
  • Greece: Alexis Tsipras and the Syriza party were victorious in their second election in eight months, receiving 35.5% of the vote, with the New Democracy party finishing second with 28.1%. The election confirms Tsipras’ power after failing to maintain campaign promises, and he now has to implement the very fiscal and structural reforms he promised to overturn.  The election gives him the mandate to implement the measures agreed upon with European creditors, in efforts to hopefully strengthen Greece’s financial position.
  • Housing: Existing home sales fell to a 5.31 million unit pace in August, below a forecast of a 5.5 million unit pace, and is up 6.2% over the past year, with prices up 4.7%. Supply expanded to 5.2 months, from 4.9 months.  The sector has benefitted from low mortgage rates and softening prices, though is lacking first time home buyers.  Housing starts fell 3% to a 1.126 million unit pace in August, and permits fell 3.5% to a 1.17 million unit pace.  Housing under construction is at its highest level since 2008.
  • Economic highlights for the week ahead:
    • Thursday, 9/24/2015: Durable Goods Orders, New Home Sales.
    • Friday, 9/25/2015: GDP, Consumer Sentiment.

Municipal market themes: PREPA, San Bernardino.

  • PREPA: The Puerto Rico Electric Power Authority failed to extend the forbearance agreement with bond insurers, after reaching a tentative agreement with forbearing bondholders. The insurers are trying to apply more pressure on PREPA, and are seeking the ability to implement measures that could help remedy the financial stress such as putting the enterprise into receivership and forcing rate increases.  Insurers have already petitioned Puerto Rico’s energy commission to increase rates by $0.042/kilowatt hour.
  • San Bernardino: Ambac insurance and bondholder Erste Europaishce Pfandbrief-und Kommunalkredit Bank AG objected to San Bernardino’s proposed settlement of a 1% recovery rate on their $50 million in pension obligation bonds. They cited “an incomplete set of solutions” based upon “internally inconsistent, and stale, data.”  The City declared bankruptcy more than three years ago, and is not close to a resolution.  The next court hearing is scheduled for 10/08/2015.

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