Greece Offers Compromise, ADP and PMIs Eyed

European indices have rebounded strongly on Wednesday on reports that Alexis Tsipras has written to creditors to accept the bailout offer in what would be an incredible U-turn from the Greek Prime Minister.

Of course, the acceptance does come with conditions attached which is hardly surprising, but they do appear to be watered down compared to previous demands. Tsipras has apparently requested that the VAT discount for islands remain and the rise in the pension age and phase out of solidarity grants to pensioners are delayed, which would represent a sizeable concession given his previous stance on pensions in particular.

No details have yet emerged on the size of the delays but barring an outrageous request, finance ministers may be willing to consider it or opt to negotiate on the size rather than the idea itself, which would represent progress. German Finance Minister Wolfgang Schaeuble wasted no time in claiming the letter lacks clarity while stating that the referendum remains an issue but that in itself isn’t a rejection of the proposal, yet.

We have to wonder what has prompted such sudden concessions from Tsipras’ government. Do they suggest that they believe the Greek people will vote in favour of the bailout terms on Sunday, giving them little room for further negotiations? Or do they fear a banking collapse if they reject it and the European Central Bank pulls the plug on emergency liquidity assistance (ELA) to Greek banks. If the closure of banks and imposition of capital controls has already caused significant disruptions in Greece, a collapse of the banks would create mayhem.

This then begs the question, if the institutions smell blood, will they be willing to compromise at all or will the just go for the kill? Then there’s the questions of what the rest of the Syriza party will think of what Tsipras is offering. Many rebelled against his offer early last week which was rejected by the country’s creditors and the latest offer would certainly amount to concessions being made. Unless of course Tsipras is now bypassing his party altogether and just trying to get the best offer on the table for people to vote on this weekend. Clearly this is not all that straightforward.

While we await the numerous inevitable comments to pour out from officials in relation to the latest proposal, probably including both rejections and optimistic tones, there is some economic data for us to focus on. The most notable tends to be the US ISM manufacturing PMI, which is expected to rise to 53.2 from 52.8, maintaining the steady uptrend since April. The revised official manufacturing PMI is expected to remain unchanged having dipped from May.

The ADP is another that is always tracked quite closely despite not actually being a great estimate of the official non-farm payrolls figure, which will be released tomorrow because of the Independence Day bank holiday on Friday. In theory, the ADP figure should provide a decent estimate of the official NFP following numerous changes to the methodology in order to improve its accuracy, but in practice it’s very unreliable. Last month is a prime example, falling short by 79,000. The final revisions may be more similar but by that point, it’s old news and irrelevant to the markets. Instead the figure is used as a warning of possible big fluctuations in the official figure that hasn’t been anticipated. For example if today’s figure was above 300,000, the markets would take this as a sign that they have seriously underestimated job creation in June, although it wouldn’t necessarily tell us by how much.

The S&P is expected to open 16 points higher, the Dow 125 points higher and the Nasdaq 39 points higher.

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Craig Erlam
Based in London, England, Craig Erlam joined OANDA in 2015 as a Market Analyst. With more than five years' experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while conducting macroeconomic commentary. He has been published by The Financial Times, Reuters, the BBC and The Telegraph, and he also appears regularly as a guest commentator on Bloomberg TV, CNBC, FOX Business and BNN. Craig holds a full membership to the Society of Technical Analysts and he is recognized as a Certified Financial Technician by the International Federation of Technical Analysts.