Market Perspective for June 1, 2015

Greece continues to be the top story as it needs billions to repay various creditors in the weeks and months ahead, yet will be barely able to make this week’s IMF payment. When organizations reach the point where bankruptcy is inevitable, they usually choose to default in order to husband their resources. Greece says it will pay the IMF, even though it is unlikely to be able to pay the organization in the ensuing weeks. Unless the Greek government is bluffing, its decision to pay the IMF indicates a deal is expected.

Public statements by European and Greek officials should still be taken with a grain of salt. Instead, stay focused on the exchange rate between the euro and the U.S. dollar. If something leaks, the currency markets will immediately tell us. The potential outcomes are not the binary extremes of a bailout or Greece leaves the Eurozone and begins to print drachmas. There are intermediate outcomes, such as Greece printing IOUs, similar to what California did in 2009. European creditors may also decide to give Greece enough money to last another week, allowing time for further negotiations.

China was also a cause of concern following last week’s plunge in share prices, but the Shanghai and Shenzhen markets roared back on Monday after rumors of central bank intervention and new stimulus plans. The rally in China was good news for commodities and other emerging markets.

Dollar General (DG), Sears Holdings (SHLD) and Medtronic (MDT) headline a light week for earnings. The May PMIs for various countries are out today. The U.S. PMI continues to show manufacturing expanding, although the strong U.S. dollar is having an impact on exports. Retail sales data for May and business inventories for April are out later this week. The trade deficit for April will be released on Wednesday; that number could lead to a change in this quarter’s GDP forecast. Currently, the Atlanta Fed’s model forecasts 0.8 percent growth in the second quarter.

Economic data out today is solid. April personal incomes were up more than expected and the savings rate ticked up. Construction spending increased 2.2 percent in April, better than the 0.7 percent growth expected by economists.

Finally, May unemployment numbers will be released this week. With the Federal Reserve zeroing in on a September rate hike, strong employment data could further boost rate increase expectations. Five Federal Reserve officials, four of whom are FOMC members, are also making speeches this week. They are likely to discuss coming changes to Fed policy.

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