Thursday July 30

Stocks firm as today’s GDP data confirms the Fed’s view that the economy is growing at a “moderate” pace. The S&P500 was flat at 2,108 while the Dow fell marginally to 17,745. Today’s GDP report was received by markets to be supportive of the Fed’s case that the economy is growing moderately. The US economy grew at a 2.3% annualized rate in the second quarter. This was slightly short of expectations, but it is still above the five year average of 2.0%. The dollar was stronger on tightening expectations and it rose 0.4% against peers to 97.49. The euro falls against the dollar to $1.0935. Jobless claims once again beat expectations reading 267k for the previous week against the expected 272k. The yield curve is flatter on the day as well as the two year yield rises to the highest level since April 2010. The two year increased 2 basis points to 0.73% and the ten year fell 1 basis point to 2.26%.

The initial reading for 2Q GDP comes in at 2.3% annualized growth. Previous estimates had been for 2.5% expansion. 1Q GDP was revised upwards from a 0.2% decline to 0.6% growth as the impact from weather and port closures was less than previously estimated. These readings are in line with the Fed’s assessment of moderate economic expansion. The second quarter numbers were driven by stronger household spending, a pickup in exports and public outlays. Personal spending was up 2.9% in the second quarter which may possibly put pressure on prices. The second quarter savings rate was down to 4.8% from 5.2% similar to Yellen’s view that households are spending on bigger items like cars. Exports were up 5.3% and imports were up 3.5% in spite of the stronger dollar. The PCE (closely watched by Yellen) was up 2.2% in the second quarter while core prices rose 1.8%.

High debt levels and Greece’s bad record of implementing reforms prevent the IMF from being able to participate in the Greek bailout as a result of their own guidelines. For now, the IMF will contribute to negotiations but cannot immediately agree to a program. It will be hard for the German parliament to support and pass a plan without the IMF’s support. Lagarde has signaled willingness to participate however many senior officials and staff don’t want to risk the IMF’s reputation. Greece violates two out of four requirements that the fund pays attention to when looking at assisting a country. First the IMF believes a recipient must be able to prove “institutional and political capacity” to implement reforms. Second, the recipient must have “high probability that the member’s public debt is sustainable in the medium term.” The fund is allowed to circumvent these rules if there is “a high risk of international systemic spillover,” and this stipulation was used earlier on in the crisis. However the IMF says this international risk no longer exists as Greek debt is no longer largely owned by private investors.

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Thursday July 30

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