September 8, 2015
Economic themes: Employment, China, Europe, International Trade.
- Employment: Nonfarm payrolls increased by 173k in August, the unemployment rate fell to 5.1%, wages increased by 0.3%, and are up 2.2% over the past year. The labor participation rate was unchanged at 62.6%, near a four decade low, and the U-6 unemployment rate, Janet Yellen’s favorite, fell to 10.3%. Strength was seen in government jobs and professional services, with weakness in manufacturing and mining, both of which were adversely impacted by weak commodity prices. Doves and hawks each found something for their liking in this report, giving the Fed plenty to debate going into the September 17th FOMC meeting announcement. Fed futures contracts indicate a 30% chance of a September increase and a 58.7% chance of an increase by year end. Any tightening of monetary policy is expected to be very gradual and runs the risk of spooking emerging stock and currency markets.
- China: Amid signs of slowing growth and the unexpected devaluation of the Chinese yuan, China’s government has spent approximately $236 billion trying to support its stock market over the past three months, which represents 9.2% of China’s freely-traded shares, and state agencies have been armed with approximately $400 billion to purchase stocks. Meanwhile, the Shanghai Composite Index has fallen by approximately 41% from its June high, despite major shareholders being banned from selling. For August, Chinese imports fell by 13.8%, representing the 10th consecutive decline, and exports fell by 5.5%, as the world’s second largest economy continues to struggle with weak commodity prices, and slowing global demand.
- Europe: Q2 Eurozone GDP increased by 0.4%, above forecasts of 0.3% growth, due to strength in household consumption and exports. German exports posted a 2.4% increase in July, well above forecasts of 0.7% growth, and German trade surplus posted a record €22.8 billion in July. Hopefully the good economic news will give the Eurozone what they need to support the largest influx of refugees since WWII.
- International Trade: The trade gap fell to -$41.9 billion in July, led by an increase in exports, specifically automobiles and industrial supplies, though weakness was seen in aircraft and consumer goods. The figure should be viewed as a boost to Q3 GDP, though August volatility could offset the gains.
Municipal market themes: Puerto Rico, PREPA.
- Puerto Rico: Governor Alejandro Padilla is expected to receive the Working Group plan on 9/8/2015, which is expected to detail a restructuring of the Commonwealth’s $72 billion debt load, and release it publicly on 9/9/2015. The plan is expected to detail how much the Commonwealth can pay over each of the next five years, including revenue and expenditure projections, factoring in tax increases and spending cuts. The Commonwealth announced they missed a September 1st payment for the Public Finance Corporation, due to not appropriating the funds.
- PREPA: The Puerto Rico Electric Power Authority reached a tentative agreement with forbearing bondholders which offers 85% of the current value of the bonds through a debt exchange. The forbearing bondholders represent 35% of the $8.3 billion of PREPA debt outstanding, and the deal sent PREPA bonds up to an average price of 67.2 from 54.5 earlier in the week. The deal would involve forbearing bondholders to exchange existing bonds for new securitized debt repaid by a utility-customer surcharge, which requires legislative approval. Speculation has it that bondholders outside of the forbearing group could have their existing debt exchanged for reduced coupons, reduced risk, rated, extended maturities, and/or convertible capital appreciation bonds.
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