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Economic Data Deluge

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Prior to the opening bell on this last day of Q2 trading, we see new Income and Spending economic metrics, along with results from this week’s latest stress test from the Fed on the U.S.’ biggest banks. On both ends, while overall news was generally good, there were notable points of weakness.

For May Personal Income, the headline figure came in exactly as expected: +0.4%. This effectively doubled our last look, the downwardly revised 0.2%. Consumer Spending, on the other hand, was half what was expected, to 0.2%. The previous month’s downward revision to 0.5% was still relatively impressive. But spending in the U.S. appears to be cooling, at least month over month.

Digging beneath the headlines, quickly: “real” personal spending came in at 0.3%, while the deflator reached 0.2%. Month over month “core” got to 0.2%, and year over year 2.0%. This is an improvement of 20 basis points above the April year-over-year read. Pre-market activity is not getting excited over any of these numbers to this point; incremental, steady growth looks to still be the name of the game.

Results from the latest round of bank stress tests are in, with all but one of the 35 total major financial institutions in the U.S. passing this week’s second level. The domestic wing of Deutsche Bank (DB - Free Report)  was the only bank to fail the test, with the Fed citing “widespread critical deficiencies” in capital planning controls. Deutsche Bank did manage to pass the first level last week.

Last week’s test looked at capital levels for banks if faced with a severe recession, not unlike the one we saw roughly a decade ago. All 35 banks passed this measure of competency. This week’s second test, by comparison, checked how banks paying out dividends, making stock repurchases, etc. would hold up under similar circumstances. The Fed objected to Deutsche U.S.’ overall capital plan; it is now expected the company will go back and realign its capital management strategies.

Deutsche Bank’s parent company, based in Frankfurt, Germany, has been going through an historically difficult period — posting losses for three straight years and trading down on the NYSE -42% year to date. Even before this latest negative headline, DB had already been placed on the Fed’s list of troubled banks. Questions regarding the bank’s credit worthiness lead to higher transaction costs, keeping the company in a tough cycle from which to escape. The stock currently carries a Zacks Rank #5 (Strong Sell) with a Style Score (Value - Growth - Momentum) of F.

Three banks that passed both levels of the stress test — JPMorgan (JPM - Free Report) , Bank of America (BAC - Free Report)  and Wells Fargo (WFC - Free Report)  — have all decided to raise dividend yields and buy back shares of stock following the results. In fact, more than a dozen banks subjected to the tests have decided to go this route in the wake of the Federal Reserve’s latest challenge.

Futures are up in today’s pre-market, following a healthy day of trading in the EU and Asia. That said, U.S. indexes will have to rally strongly today to reach their highs from earlier this week.

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