Monday June 1

Stocks rise as a result of strong economic data. The S&P and the Dow both rise 0.2% to 2,111 and 18,040 respectively. An ISM manufacturing index and a purchasing managers index both beat estimates. In addition, construction spending last month rising 2.2% versus the estimated 0.7%. Personal income rose larger than expected, however the core PCE price index showed that inflation rose at a modest 1.2% rate last month less than expected as consumer spending missed estimates. These numbers contribute to positive movements in equities, as the data was strong but inflation was modest enough to not encourage tightening too quickly. The dollar index rose 0.5% to 97.43 as a result of the strong data, and the dollar rose to $1.09 against the euro and Y124 (yen per dollar). Yields in the U.S. rose with the 2 year rising 5 bp to 0.65% and the 10 year rising 8 bp to 2.18%. In Europe, the spread between German bunds and sovereign debt from peripheral countries widened reflecting continued concerns over Greece.

Eric Rosengren from the Fed believes that the economy is not ready for monetary tightening. Rosengren is a dove who is a non voting member of the FOMC. He believes that consumers need to show a “behavioral change” before the Fed raises interest rates. This alludes to today’s personal income report, which showed that personal income rose however reduced consumption and increased saving dampened inflation. In addition, Rosengren cites GDP and consumption levels as reasons that the Fed should not tighten. GDP growth has averaged above 3% in the years leading up to previous tightening cycles by the Fed. Over the past two years GDP has averaged only 2.3% and is likely to be modest this year as GDP growth for the first half of 2015 will likely be well below 2%. In addition, consumption is below its pre crisis levels. Although economic forecasts predict that inflation will pick up later this year, Rosengren asserts that the actual data needs to catch up with forecasts before tightening begins citing the Fed’s data dependency. He believes that the models to not take into account behavioral changes from consumers, and as a result forecasts for inflation and consumer spending may miss estimates.

Angela Merkel hosts an emergency summit in Berlin with Greece’s creditors in order to come up with a deal to present to Greece. Eurozone leaders present at the meeting included Christine Lagarde, Mario Draghi, Francois Hollande, and the president of the European Commission. There is great uncertainty that Greece will be able to pay its expenses this month including a €1.6B payment to the IMF at the end of June, and tension is increasing between Greece’s creditors. The IMF has been strict and firm in its negotiations, as the fund has to abide by and maintain its own lending guidelines. The European Commission has expressed more leniency towards Greece, as its objective is to keep the eurozone together and to maintain the shared currency. Most finance ministers support the hardline negotiations. Angela Merkal supports financial prudence however stresses the importance of European unity. The creditors hope to resolve their issues, and come up with a deal to present to Greece.

Petrobas today announced the sale of a 100 year bond. Petrobas is the state owned oil company in Brazil and they hope to capitalize on the idea that the Brazilian government will not let the giant fail over an extended period of time. They hope to raise $2.5B at a yield of 8.45% (which seems very low) to be due in 2115. Petrobas is currently engulfed in a large scale corruption scandal. It is alleged that the company has engaged in a multibillion dollar bribery and kickback scheme that included the highest levels of the company and the Brazilian company. As a result of the scandal, Petrobas has not accessed global capital markets in the last year.

Monday June 1

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