U.S. stocks rebounded following three sessions of decline as those concerns over Greek debt, default and the Euro banking system appeared to ease yesterday (the ebb and flow of this issue that we began to talk about a year ago remains ever-present). 

Some optimism arose from word over the weekend that French banks propose rolling 70% of maturing debt into new Greek 30-year bonds – though you’d never know it by watching spreads as the yields on Greek, Irish, Portuguese and Spanish bonds all screamed wider.  The next big test comes tomorrow when that Greek austerity vote takes place.

Tech, consumer discretionary and financials led the rally.  Basic material, consumer staple and health care shares were the biggest losers. 

In a speech yesterday, the president of the Minneapolis Federal Reserve Bank proposed changing the tax system, not for the focused purpose of achieving higher growth rates but to discourage households and institutions from accumulating too much debt.  Really?  That’s his reason for the debt problems we’re currently dealing with?  While tax deductions certainly incentivize people to take on more debt, the sine qua non is low interest rates – specifically, extremely low or even negative real interest rates.   It never ceases to amaze me how the Fed never accepts blame.  Financial bubbles and the ensuing economic disturbance is never a result of their policy decisions. 

Market Activity for June 27, 2011

Sector Activity for June 27, 2011

Personal Income and Spending

The Commerce Department reported that personal incomes rose 0.3% in May (a 0.4% pick up was expected) and spending was unchanged (missing the expected 0.1% increase) after both numbers were revised down a touch for April. 

The main component of personal income – wages & salaries – rose just 0.2% last month; that number is up just 2.8% year-over-year, down from 3.9% as of March.  It gets worse.  Take government transfer payments from the mix and incomes were up just 0.1% -- haven’t advanced in four months.  Adjust disposable income (after-tax income) for inflation and it’s gone nowhere since January – up 0.6% year-over-year, which is down from 2.7% just four reporting months ago. 

Spending was unchanged in May – 0.0% print (expected to inch up 0.1%) – and is negative quarter-to-date when adjusted for inflation (that inflation adjusted number is what counts for GDP). 

The personal cash savings rate (cash savings as a percentage of after-tax income) bounced back to 5.0% as spending was flat last month. 

So here we are:  Gasoline prices have come down (although at roughly $3.55 for the national average is still much too high for most consumers’ comfort), but incomes have weakened.   Many have talked about lower gas price as a spending catalyst, but it needs to combine with healthy income growth.   There is no catalyst right now, and this economy remains must too weak to foster the level of job growth we need. 

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Have a great day!

Brent Vondera, Senior Analyst