Market commentary

Producer prices for the month of May rose only 0.2% versus 0.8% in April as higher oil prices receded a bit. Subtracting food and energy prices, the core PPI also rose 0.2%, bringing the year-over-year producer price index to plus 2.1%.

Retail sales for May were expected to have declined 0.4%, however, sales declined only 0.2% so this was taken as good news, and is what is driving the stock markets higher. If you are like me, noting that consumers are spending less should not be taken as a reason buy stocks, but markets and investors are rarely logical.

China raised its bank reserve requirements again overnight to try slowing the pace of inflation, which is currently running at 5.50%. At the same time the government ordered lenders to raise their cash reserves from 21.0% to 21.5% to restrain the rate of lending, and speculating.

And finally, S&P cut Greece’s rating from B to CCC and kept them on negative outlook Monday, citing the likelihood of default by the country. Greece is now the lowest rated sovereign credit by Standard & Poor’s; below Pakistan, Argentina, and Ecuador. The latter two have recently defaulted. Why should we care what happens in Greece may ask. Well, it turns out the lessons from AIG have not been learned well. Recall AIG was the counter-party on billions of dollars of credit default swaps---basically insuring the bond holders against losses. What has not been widely reported is that a few large U.S. banks are the counter-parties (aqua, the insurers) for billions of dollars of European debt, including Greece.

U.S. Treasuries are in full sell mode this morning as the stock market rallies. The yield on the 10 year note has risen to 3.09%, and mortgage prices are .375% to .50% worse from Monday’s market close.