At 5am, both the euro and European stock markets started to roll over and the S&P futures steadily followed over the past few hours. We now have the ECB threatening to pull funding to Greek banks if there is any debt restructuring as they would no longer want to accept their paper as collateral for a loan. The Greek 10 yr yield is rising to a record high and its spread to the 10 yr German bund is at 1343 bps. The spread was 20 bps when all was calm in early 2007 when subprime was just about to implode. With the WSJ reporting that regions in Spain have understated their debt obligations, the Spanish 2 yr yield is rising to a 5 month high and their 10 yr is approaching 5.5% again. On the inflation argument, many economists and specifically Fed members believe that as long as we don’t have upward wage pressures, there is nothing to worry about with inflation. They should tell that to the Gap who announced that product costs per unit will be up 20% in the 2nd half of ’11 which will not be all passed through as cotton prices near 150 yr highs offsets little labor cost pressure. Whether commodity inflation is reflected in wholesale prices or consumer prices or both, someone has to eat it to the detriment of the economy.
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