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Week In Review

European Central Bank

Draghi made comments that the ongoing reflation in the Eurozone gives the ECB the ability to pull back from the current unconventional measures without tightening the monetary policy stance.  Markets took this to signal a more hawkish shift in the ECB’s stance, as the Euro rallied over 2% against the dollar and ten-year Bund yields increased by about 20 bps.  Ten-year Treasury yields also increased, but less than the increase in yields for Bunds.

Our Take

The ECB seems to be undergoing the same hawkish shift in policy direction as the Fed.  Both of these central banks are seeking to normalize rates and their balance sheets, seemingly in contradiction to their claims of data dependence.  Whatever the reasoning for the shift at the Fed and the ECB, a first step toward a return to more normal rates and balance sheets and the corresponding reduction in the distortions caused by recent policy actions of these two institutions is a welcome development.

Personal Income and Spending

Personal income rose 0.4% in May, while personal spending rose 0.1%.

Our Take

Spending remains muted in 2017 as cautious consumers continue to increase savings.  While income growth is healthy, yet unspectacular, economic growth is likely to remain lukewarm unless consumer activity picks up meaningfully.


The Personal Consumption Expenditure Index, the Fed’s preferred measure of inflation, fell 0.1% in May.  The core PCE rose 0.1%.  Both measures have risen 1.4% over the last year.

Our Take

As their target is 2.0% inflation, a data-dependent Fed would view this report as a reason to hold rates steady.  Time will tell if that actually happens.

Italian Banks

The EU ruled two failing Italian banks “not significant for financial stability,” thus allowing Italy to bail them out using taxpayer funds without senior bondholders having to take a haircut.  This circumvents the previous EU rules requiring that bondholders take losses before taxpayer funds are used for recapitalization.

Our Take

This action by the EU and Italy reestablishes the potential for a failing banking system to drag its host nation into a fiscal crisis as in Spain and Ireland several years ago.  Given Italy’s already high indebtedness and the poor conditions of Italian banks, the precedent set here could easily revive concerns of a fiscal crisis in Italy.


California Governor Jerry Brown signed the state’s $183 billion budget on Tuesday, the state’s largest ever.  California’s budget increased by $12 billion compared to the last fiscal year.  The balanced budget includes increased spending for education and health care programs and will include funding for new transportation projects.  In addition, the state’s rainy day fund is due to grow to over $8 billion after the $1.8 billion contribution for the next fiscal year occurs.

Our Take

Governor Brown, along with Republican and Democratic lawmakers, were able to agree on a bipartisan, on-time, balanced budget.  California’s fiscal health continues to improve.  California has benefited from increasing income tax collections and a growing economy.  The rainy day fund, which has been in place since 2014, will reach its highest level since it was established.


All expressions of opinions are subject to change without notice in reaction to shifting market conditions.  All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness.  Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice.