U.S. futures are pointing to a positive start on Tuesday ahead of some key housing data for April, while European markets have been given a massive boost by some unexpected dovish comments from an European Central Bank board member and a softening in tone from Greek officials.
Building permits are expected to have risen to 1.06 million last month, not far from the near seven year highs reached in February, while housing starts are expected to have rebounded in the same month following the temporary downturn during the winter months. Both figures point to an ongoing recovery in the housing market and are near the highest level since the financial crisis, which further supports the view that the recovery is on a stable footing.
European bond yields are on the decline this morning, following a month long run that has caused havoc in the markets. The yield on the German Bund rose from 0.077% on 20 April to 0.72% last week, before stabilizing slightly in recent days. Comments this morning from ECB executive member Benoit Coeure have spurred interest in bonds again this morning after he claimed the central bank could “front-load” the quantitative easing program following the recent sell-off, after admitting that he is concerned about the pace of the moves. Aside from the impact in the bond market, this has also provided a big boost to equity markets while the euro has fallen from 1.13 to 1.12 against the dollar and looks likely to fall further.
Greek Prime Minister Alexis Tsipras has also claimed that the country is close to a deal with its creditors as it hopes to prevent a total run on Greek banks that is already well underway, with them being heavily supported by the ECBs emergency liquidity assistance program. Finance Minister Yanis Varoufakis has also claimed a deal is very close, which suggests both have agreed to compromise much more and accepted that they cannot just allow the country to default. The question remains, where are they willing to compromise and will those prior red lines be crossed. I see no way of that being avoided as the European Commission, ECB and International Monetary Fund will not back down. At best they will offer mild concessions on the fiscal surplus target or the promise of future debt write-off’s if Greece completes the program as planned. Even this would surprise me though as the other leaders will not want to face a backlash at home for taking an easier stance with Greece.
The U.K. experienced deflation as measured by consumer price index for the first time since March 1960 according to the latest figure released by the Office for National Statistics today. Prices fell by 0.1% last month, down slightly from 0% the month before, which may cause alarm because of the negative ramifications associated with deflation but on this occasion there is nothing to worry about.
The primary driver of the decline in inflation has been a decline in oil and food prices, both of which represent compulsory spending in most households which therefore puts money in people’s pockets rather than encouraging them to delay future purchases. If anything, I would expect to see non-compulsory spending pick up as a result of this, not decline.
Another contributor to the decline in April was the timing of Easter this year. Last year it coincided with when the data is collected and therefore air and sea fares were inflated, as is typical during the holiday period. This year, Easter took place earlier in the month and therefore prices were much lower when the data was collected, compared to last year. This creates a temporary and false distortion in the figure that while being small, was enough to tip the overall reading into negative territory.
Economic sentiment took a sizable hit in May as the threat of a “Grexit” weighed on analyst and investor expectations. We’ve already seen the impact that it has had on sentiment throughout the region, while Greece itself has fallen back into recession as a result. The uncertainty regarding the impact a Greek default and exit would have on the fragile economic recovery is more than enough reason to deter investment. On the bright side, if a deal is reached before Greece defaults, I would expect these figures to rebound quite quickly.
The S&P is expected to open 2 points higher, the Dow 26 points higher and the Nasdaq 5 points higher.
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