Vince Farrell
CNBC Contributor

Canada raised its key overnight lending rate .25% to .50% Tuesday despite the world-wide caution over the trend in global economic affairs.

But they had little choice.

Over the last two quarters real GDP (adjusted for inflation) has increased 5.5% and nominal GDP at better than 10%. Money supply has increased and bank loans are up at an 8% annual rate. House prices are still rising and I was surprised during my last trip to both Montreal and Toronto at how expensive housing was. Employment growth has been strong with the rate of unemployment falling to 8.1% from a recent peak of 8.7%. Consumer inflation, both headline and core, is less than 2% which is in line with the Bank of Canada's objective.

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Canadian banks are the envy of the world.

Be it by circumstance or excellent planning, the banks have avoided all the bubbles that have crippled the rest of the large world banks.

They have less that $1 billion in exposure to the Southern European countries.

Not so the European banks.

Euro zone banks have just shy of $2 trillion in exposure to Greece ($188 billion), Ireland ($534 billion), Portugal ($240 billion) and Spain ($851 billion).

Part of the Tuesday early morning news that started the market off badly was a report from the ECB that some $195 billion of that bank exposure will be written down the next two years. I have no idea what might happen but the past few years have left me with little confidence that the first estimate will be right. Too many people have talked about problems being "contained" only to have the situation escalate.

I hope it is only $195 billion but I fear it will be much more.

The US banks by the way have $131 billion in total exposure.

Even if all of that $131 billion were to be written off (highly unlikely all of it would be), US banks would still have robust capital ratios. Capital Economics reckons that such a write off would still leave tier one capital of the large banks at an average of 10.5%.

This Friday will bring the monthly jobs report for the US (I expect a big number: more on that later in the week). The Euro zone came out early Tuesday and the good news was Germany's unemployment toll fell by 45,000, which was the eleventh month in a row of better numbers. The rate of unemployment also fell to 7.7%, a 17 month low.

The bad news was the Euro zone in general saw worse numbers. Unemployment rose by 15,000 and the unemployment rate up-ticked to 10.1% from 10.0%. German retail sales happened to rise last month but are still down 3% at an annual rate. That shows consumers, even in relatively prosperous Germany, are cautious.

China's Purchasing Managers Index was a still robust 53.9 (50 is the dividing line between expansion and contraction), but it was expected to be 54.5 or so.

The conclusion is that China's government attempt to slow the economy and prevent inflation is bearing fruit. Avoiding inflation is good, slowing growth when the rest of the world is struggling is not.

The US Institute of Supply Management Index for May was released at 10AM Tuesday and came in better than expected at 59.7 (consensus was 59.4) and, while a very good number, is a touch off from last months 60.4. It might seem like splitting hairs, but with China ever so slower and the US ever so slower the question needs be asked: have we seen the best of the post recession growth phase? I simply ask the question. The ISM for manufacturing would imply a GDP growth of almost 5% if that were the only number. But manufacturing is about 13% of the US economy and even less of employment. While manufacturing is in a "V" shaped recovery, the rest of the economy is not.

Construction spending rose 2.7%, much better than hoped for and a good bit better than last month's .4% gain. This is the first two month gain since 2007. The 2.7% increase was also the best month since August of 2000. Unfortunately the areas of biggest gain came from the very volatile communication, power, and manufacturing sectors. You can't rely on these areas to show consistency.

I think our economy will slow, but not stall or stop. I do think earnings estimates will come down and stocks typically struggle when that happens. I believe that last year's fourth quarter will be far and away the best for GDP growth we will see for a while. I hope the next few quarters can match the preliminary read for Q1 at 3.0%, but I suspect we will not. The dollar will continue to be the best house in a bad neighborhood and I think the S&P will need to spend some time backing and filling between 1040 and 1100. 

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Vincent Farrell, Jr. is chief investment officer at Soleil Securities Group and a regular contributor to CNBC.