"Kee" Points with Jim Kee, Ph.D.

Europe: Last week European leaders struck a deal, surprising in its detail, to assist Spain and Italy in the form of rescue funds to recapitalize Spain’s banks and to purchase Italian sovereign (government) bonds (Financial Times). These steps were important for boosting confidence in Euro-area support for troubled countries and thereby lowering the risk of a self-fulfilling prophesy of widespread insolvency. That is, a loss of confidence in Spain and/or Italy’s ability to roll over its short-term debt would lead to higher interest rates, and higher interest rates increase the debt burden and make default/insolvency more likely. Indeed, that is why Italian Prime Minister Mario Monti is requesting (but as of yet not receiving) measures that would automatically trigger EU bailout funds if Italian borrowing costs rise to unsustainable levels. Yields on both Spanish and Italian bonds dropped in response to last week’s actions.

U.S. Healthcare Ruling:
Of course, the big news in the United States was that the Supreme Court upheld the constitutionality of the 2010 healthcare reform legislation (The Patient Protection and Affordable Care Act) including the crucial individual mandate that requires individuals to pay a penalty if they fail to carry minimum essential health insurance (CCH Tax Briefing). The provision forcing states to expand Medicaid eligibility did not pass the court’s ruling. This was pretty much what most of the strategists out of Washington were expecting, so even though the passage was extremely close it seemed to be the consensus outcome, and I think that explains the market’s lack-luster reaction. And most businesses seem to have been operating under the assumption that the healthcare law would stand (Renmac). Uncertainty on the fiscal side (tax, spending, regulation) is probably the biggest impediment to growth in the U.S. right now, but while the court’s decision reduces uncertainty, the Romney campaign’s pledge to dismantle the legislation if elected probably makes it a wash with regard to policy clarity going forward.

Global activity: Manufacturing data over the weekend from China and Japan, while weaker than prior months, was a bit stronger than analysts expected. Eurozone data continues to disappoint. In the U.S. today’s ISM manufacturing index release showed a PMI at 49.7% for June (down from 53.5 in May). That’s slightly in contraction mode for manufacturing but indicative of expansion for GDP overall. Today’s weak number is consistent with prior releases from some of the regional indices (New York, Philadelphia, Richmond, Kansas City). The view I see for the U.S. from the majority of credentialed analysts is one with a low probability of recession, but it is also an outlook where few forecast GDP growth to exceed the 2% mark. That is my view as well.