Stocks fall as negotiations in Europe further deteriorate. The S&P falls 0.3% to 2,102 and the DJIA loses 0.4% to 17,890. Economic data in the US was better than expected with the personal income and spending reports coming in strong. This contributes to the notion that the Fed may begin to raise interest rates in September. Furthermore, the differences between Greece and its creditors continues to widen as talks reach another deadlock. As a result of these two factors, markets pulled back today. The 10 year Treasury increased 3 basis points to 2.40% possible due to the strong economic data. In Europe, yields and equities were surprisingly calm as the euro rises slightly to $1.12.
Greece’s creditors present their final offer. The most recent talks have not yielded any new developments. Creditors have conceded some terms, and are now closer to what Athens had originally wanted. Reports say that Greece quickly rejected this offer. Tsipras didn’t propose any new concessions or plans of his own. Wolfgang Schäuble is pessimistic, citing no progress in talks and big differences in expectations between Greece and creditors. It is now up to Greece to make concessions and reach a compromise. Angela Merkel says that talks have even gone backwards in some aspects of the negotiations. Analysts now say that Friday is the latest point that Greece will be able to reach a deal before defaulting. Greek banks are now relying on Emergency Liquidity Assistance from the ECB.
Volatility in yields due to Greece has postponed some issuances. This has resulted in a backlog of deals in banks. In the US the opposite dynamic is taking place, as issuers are rushing to raise capital before the Fed raises rates. In the US BoAML forecasts a big summer in bond issuance. So far on average $25bn has been raised each week versus the average of $17.2bn between 2010 and 2014. A complication to liquidity is the trend that fund managers are now buying less bonds as they hold more cash anticipating potential fund outflows.
Consumer spending for May rose by the most in six months. Expenditure increased 0.9% from the previous month as economists expected a 0.7% gain. The drop in oil prices is possibly finally causing consumers to spend money. Along with the housing recovery, these are bullish factors for the US economy and are signs that a rate hike will occur sooner rather than later. Jerome Powell and John Williams both support an initial hike in September, with an additional hike again before the end of 2015. Five other voting members of the FOMC only support one increase this year. Personal incomes rose 0.5% in May which is indicative of a 4.4% yearly increase. In spite of these numbers inflation is still low.