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Was It All the Weather?

By: Rissmiller, 04/07/2014

We have had a number of client questions on how much severe weather has impacted the U.S. economic data.

Last week’s numbers gave some early indications on this front.  The U.S. employment report was solid in March, with a rebound in the workweek to 34.5 hours.  Nonfarm payrolls gained +192,000 m/m with upward revisions of +37,000 to prior months.  Those are solid readings, though the boost from emergency unemployment benefits ending could mean that some of this strength is temporary.  Nonetheless, the +29,000 gain in temp-help employment (a leading indicator) suggests some economic momentum as we start 2Q. 

The U.S. mfg & non-mfg PMI measures also showed resiliency, with Strategas analyst Norbert Ore noting last week that “the debate will continue as to the net impact of the polar vortex on the U.S. economy, but that is now in the rear view mirror.”  U.S. vehicle sales also bounced in March, up to a 16.3 million seasonally adjusted annual rate. We're staying tuned.


Why Would a Puerto Rico Debt Crisis Matter?

By: Tzitzouris, 10/16/2013

As global financial markets zero in on Washington, D.C., another potentially disruptive event is lurking in the warmer waters just off the U.S. mainland, and the likelihood of a default there is far higher than that of the U.S. government. 

Puerto Rico, the heavily indebted and struggling island commonwealth, is in the midst of a full-on bond market assault that now threatens the government’s ability to raise capital. And for a government with a heavy per capita debt burden (recent figures show public debt of about $17,000 per resident) and a potential budget shortfall of $1 billion in the coming year, bond markets are the lifeblood that keeps the economy churning and the government from defaulting. But why should investors care about Puerto Rico, particularly those in the equity or non-municipal bond markets? Because in terms of non-sovereign government borrowers, Puerto Rico is a behemoth, with roughly $60 billion of direct and indirect obligations outstanding, with another $10 billion in limited obligations. 

What’s more, Puerto Rico’s bonds are broadly held by an investor class that’s not use to sensational, headline grabbing credit events, or at least it wasn’t until Detroit’s recent bankruptcy. This alone is reason enough to worry about Puerto Rico, as it treads closer and closer to a distressed borrowing state. But perhaps the deeper answer as to why Puerto Rico matters is that the global reassessment of government credit quality has largely bypassed the North American continent. 

Even as we write this, the U.S. government continues its own fiscal battles, with sporadic warnings of default consequences, yet bond markets have largely priced in little event risk, despite the 24 hour coverage that it’s been given. A Puerto Rican crisis could threaten to bring this risk directly to North America, with immediate implications for states like Illinois and California first, provinces like Ontario and Quebec second, and eventually the U.S. government itself. Along the way, a Puerto Rican crisis can also slow any momentum in the U.S. economy by slowing or delaying state and local government spending, and even push some smaller distressed local governments over the edge and into bankruptcy by closing off their own bond market access.

In short, Puerto Rico matters because it’s large enough to immediately disrupt capital markets, while also being so broadly held that losses from a restructuring or default could impact the borrowing costs for a wide swath of issuers over the longer-term. Because of this, we worry about Puerto Rico for the same reasons that we worried about Spain and Italy in 2011 and 2012; not because we necessarily anticipate a crisis, but rather because the impact from stress in such a broadly held credit can be difficult to predict and it almost always requires a discount on top of any visible losses. 

Admittedly, a Puerto Rico crisis would pale in comparison to the previous risks posed by Italy or Spain, but the odds of a Puerto Rican crisis are also much higher than those associated with these Mediterranean sovereigns, and because of that, Puerto Rico matters!

Tom Tzitzouris is a Vice President in fixed income strategies for Strategas Research Partners.

Published by Forbes 10/16/2013