.The poet’s “merry month of May, so frolic, so gay”, was none of these this year, as Greek/European debt woes and other developments piled up to send stocks reeling, worldwide. Throughout May-early-June, the Dow Jones Industrials index was declining. From its 1H2010 high of about 11200, it fell near 9800 in early June, is now back above 10,000, and frantically seeking direction. In parallel fashion the Euro (EUR), which had started the year near 1.43 USD is now around 1.20 USD (a 16% rise for the USD). Flight-to-quality and renewed doubts about the world recovery drove interest rates lower. For example, the US 10-year Treasury note saw its yield near 3.10%, after going briefly to 4.0%, not too long ago. • In 2Q2010, Greece, Portugal, and Spain saw their sovereign debt downgraded. They and others, even in the stronger economies of Germany and France, realized that their fiscal accounts had to return to sustainable paths, lest they suffer their own Greek tragedy. Austerity packages, more or less detailed, more or less credible, were advanced by almost every government in the Euro zone (and in the UK). The result: potential further weakness of the EU economy, and less upward pressure on prices in an already deflationary environment. Therefore, the ECB (European central bank) is not expected to raise interest rates for quite some time. • In the no-rate-hike club, the ECB is joined by the US Federal Reserve (Fed) and by the Bank of Japan (BOJ). The latter is currently facing outright deflation, Japan’s CPI rate has been in negative territory for 15 months now (-1.2% y/y in April). The US CPI numbers are above water, 2.2% y/y in April. However prices are unchanged in the last three months, both overall and on a core-CPI basis. In other words, three of the four largest economies are mired in zero-inflation/deflation for now.
