US GDP Prints Below Trend

Federal Reserve officials hit the newswires yesterday with leaks outlining the seriousness of the intention to raise interest rates not once but twice before the end of 2015. This came on the heels of the final first quarter GDP reading which showed the economy contracted modestly over the prior period. With growth below trend, market participants are wary of the Federal Reserve raising rates during a period of cyclical weakness. However, the Federal Reserve is unwilling to let the market determine the future of rates as evidenced by the dismissal of the potential volatility that will emanate from any shift in policies. Markets were confident that the latest GDP reading was evidence of a rebound in the real economy as the contributions from rising inventories and spending on healthcare offset the weakness in exports and fixed-asset investment. Equities gave up ground during the cash session, led by losses in the Dow Jones Industrial Average.

Parties left negotiations early yesterday after Greece refused to concede to the IMF’s demands to lower pension obligations and focus less on tax increases versus spending cuts. Several officials remarked after the fact that the progress was insufficient and that nothing new had been proposed outside of existing requests. The Eurogroup Finance Ministers will be meeting today and negotiations with Greece are set to resume later today but optimism in the ability to reach an agreement is waning as time passes. The current bailout package is set to expire on June 30^th and without an agreement the European Central Bank will likely remove support for the Greek banking system which will lead to imminent capital controls. If any deal is reached, it will also be required to pass muster in the Greek Parliament which is becoming increasingly fractured. After trending modestly higher versus the Pound yesterday, the Euro is retreating once more.