- Greek extension brings relief
- Market seeks Yellen guidance
- Inflation to dominate proceedings
- “Big Dollar” favored across the board
The four-month extension of Greece’s support program agreed late last Friday has done nothing to change the probability of Greece potentially leaving the Eurozone. The market should remain realistic to the fact that the path towards a new agreement remains bumpy and is expected to hit some major potholes if the last 10-days of negotiations or political infighting is an indicator. This morning the markets trade with relief that a last minute agreement was struck which is managing to support both bonds and equities to an extent. The agreement only buys “time,” it cannot be ruled a victory for anyone. Today Greece has to present a list of budget cuts and economic overhauls, which has to pass the scrutiny of the supervisors of the bailout (Troika – IMF, EC and ECB). Tomorrow, Euro finance ministers get to review their proposal.
Yellen Front and Center
Once Greece satisfies conditions to secure a four-month extension then market focus will quickly shift to this weeks Fed expectations. Last months FOMC minutes were balanced, while highlighting the improving U.S economy and planning for “starting lift-off” of higher rates. Ms. Yellen’s testimony this week will have the market eyeing comments regarding international developments, a strong USD, jobs data and cooling inflation. The Fed Chair is due to testify on the Semiannual Monetary Policy Report before the Senate Banking Committee, in Washington DC starting Tuesday. After reading a prepared statement the committee will hold a question and answer session. Since the questions are not known beforehand they can make for some unscripted moments that potentially could lead to heavy market volatility.
The market is expecting that Ms. Yellen will likely emphasize that the Fed remains data dependent. Investors and dealers continue to look for clues on rate hike timing. There is a possibility that Yellen may also hint at whether “lift-off” happens as soon as the June FOMC. If she conveys confidence that the Fed can normalize policy in June, treasury yields and the USD should be capable of finding a bid. If tightening hints are coupled with a bullish economic outlook, the hit to global equities could be limited. The challenge will be for EM currencies already at or near record low levels outright. If on the other hand, Yellen emphasis Fed patience while assessing other developments, expect the USD to suffer and correct lower while U.S equities in particular should be capable of finding a bid.
Inflation, inflation and inflation
Taking Greece and Yellen out of the equation this is another fairly busy week for data releases and it’s dominated by inflation or prices. The U.S kick starts off with January’s existing home sales this morning, house-prices tomorrow, consumer confidence/new home sales Wednesday. Thursday brings January U.S CPI, durable goods and weekly jobless claims. On Friday we witness the second estimate of Q4 U.S GDP reading (see at sluggish +2.1% annualized vs. original +2.6% estimate) along with January’s PCE and February University of Michigan sentiment.
Around the majors, from the Eurozone’s perspective, final inflation numbers Tuesday are set to confirm overall prices down -0.6% y/y, matching the flash estimate. Japan’s main event will be January’s CPI Thursday along with IP and retail sales. China will close out the month with February flash manufacturing PMI on Saturday. It’s expected to show manufacturing contracting for a third straight month from the world’s second largest economy.
Europe’s largest economy, Germany’s Ifo index held its own in February this morning, but did not do nearly as well as the market had been expecting (106.8 from 106.7 vs. market expectations of 107.7). The current conditions indicator declined while expectations improved. The subjective view would have you believing that the German economy is proving “robust in the face of political uncertainty.” Currently, for starters the eurozone has to weather the Russian/Ukraine conflict, terrorism and Grexit. This morning’s softer than expected headline fueled fresh EUR selling as the market heads stateside (€1.1300). It’s unlikely to see a sustained down move on IFO alone. Maybe softer U.S existing home sales as forecasted (+5.03m) could be the stronger influencer ahead?
Through €1.1300 will have reversed most of Friday’s gains, leaving the two €1.1270-75 lows vulnerable. Last Thursday’s €1.1450 is keeping a lid on the single units strength for now.
From the “big dollar’s” perspective, there has been broad-based USD buying seen in this morning’s Euro session ahead of Ms. Yellen’s bi-annual testimony (Tuesday and Wednesday). The greenback has made some significant gains against all major and commodity-related currency pairs. The overall relief that Greece has, in theory, a four-month extension of its loan program, is helping Euro peripheral yields to move lower. Portuguese 10-year government product is at +2.10% – below its U.S counterpart for the first time in eight years!
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