Daily Clueless Musings 6/27

Stocks rallied before Greece voting for the austerity plan. Fronts bounced back slightly, but they are still pricing significant liquidity risk. Wednesday's vote is the first step for Greece to obtain the 12 billion EUR money they need to meet their debt payment through Aug. If they fail to pass the vote, a default is going to be imminent. EU sources told Reuters that they have ruled out several options for Greece should the austerity vote fail. Real consumption in the US fell 0.1% in May and the change in spending for April was revised down from +0.1% to -0.1%, while spending in +0.3% yoy, as consumer continues to deleverage. Real consumption growth for 2Q is only tracking about 0.8% gain yoy. Ironically the savings rate is high, when the real interest rate is in the negative territory. The core PCE deflator increased 0.257% in May which was its strongest monthly increase since October 2009; the index has risen 2.2% annualized over past three month and up 1.2% yoy. The first 2 year auction after FOMC was a nearly 1 bp tail. Market needs to wait until the Jackson Hole for the much hoped (or tweeted) interest rate cap. There were not many option flows. Front vols were slightly lower. Paper took off some of their libor crisis trade, they bought back N1 96C vs N1 92-5P>. They also sold U1 92-5 P>.