We’re seeing risk aversion in the markets in pre-market trading on Friday, as investors opt for the cautioun approach ahead of the US jobs report and after it was reported that Greece will refuse to repay €300 million to the International Monetary Fund that is due today.
It is believed that Greece is able to make the repayment to the IMF but opted to bundle together all four of this month’s payments – totaling €1.6 billion – and repay it on 30 June. This partly allows Greece to continue negotiating with its creditors for a few more weeks to try and get what it believes is an acceptable deal while paying workers and pensions, but it also appears to be politically driven. Greece is sending a message that it will not tolerate this anymore and creditors need to come to the negotiating table with a credible plan, having already stated that their proposal is the only realistic one.
A call between Greek Prime Minister Alexis Tsipras, German Chancellor Angela Merkel and French President Francois Hollande on Thursday is believed to have been “constructive” according to Greek officials, although that term has been thrown around so many times now while marginal progress has been made that it’s basically lost all meaning. The next step will now be Tsipras briefing parliament at 6pm local time today (3pm BST).
It is likely that the majority in parliament will support Tsipras’ stance on VAT, which its creditors wish to raise, and pension reform, after proposals to cut them by 1% for each of the next two years were rejected. These are the so-called red lines for Tsipras and it seems he is still unwilling to budge. With the institutions taking the same stance, it’s tough to see how we can see any progress from here. Unless of course, parliament offers support to the proposals put forward by Greece’s creditors in a desperate attempt to get a deal done. Somehow I doubt that will happen. The only other alternatives would be a referendum on creditor proposals or snap elections, but this would probably only get Syriza re-elected.
The U.S. jobs report will be released shortly before the U.S. open today and is being viewed as a make or break moment for the economy. This is obviously extreme but people are looking at today’s report with the view that a good number puts September back on the table for a Federal Reserve rate hike, while a bad number suggests this “transitory” period of poor data has continued into May, bringing into question whether it is in fact transitory at all or just a cooling economy.
I still believe that the Fed wants to hike interest rates this year and begin the process of normalizing interest rates and if the data picks up in May, I think it would be the correct decision. I find it hard to believe that when unemployment is at 5.4% the U.S. requires monetary policy as supportive as this. I also struggle to see how a 0.25% hike will make such a big difference, in fact it should be seen as a sign of confidence, the economy is on a sustainable path to recovery.
While the non-farm payrolls and unemployment figures tend to write the headlines, the average hourly earnings figure is what will be key for me. The Fed wants to see signs of wage growth that will drive future inflation. Spending has been subdued this year which is disappointing but if we can still see wages picking up, it would suggest that spending will eventually follow.
The FTSE is expected to open 21 points lower, the CAC 35 points lower and the DAX 90 points lower.
For a look at all of today’s economic events, check out our economic calendar.