Summit Concludes, Euro Resilient, Greece Unresolved

Currency in Crisis

The first European Summit of the year ended with a shroud of uncertainty hanging over Greece.  Officials are sounding an optimistic note that an agreement will be struck before the end of the week, but an agreement will l simply shift the focus from the terms to the participation rate and the recognition that even a haircut of some 70% on a net present value basis is insufficient to put Greece's debt n a sustainable path. 

All EU members, save the UK and the Czech Republic agreed in principle on four key elements that form the basis of the scaffolding of what will eventually be a fiscal union.  First is a debt brake, enshrining a balanced budget (0.5% structural deficit maximum) with automatic corrective measures to kick-in on violation.  This was Germany's position.  Second, if the brake law is too soft, the European Court of Justice can impose a 0.1% of GDP fine.   This is softening of Germany's demand that a country that violates the debt agreement could be taken before the ECJ. 

Third, the burden is shifted.  Sanctions will be imposed on violators unless a qualified majority over-rules as opposed to now where sanctions are only imposed if a qualified majority agrees (hence in practice no sanctions).  This was Germany's position.  Fourth, countries agree to include collective action clauses into new bonds as of January 1, 2013, earlier than previously discussed.  This is also in line with Germany's agenda. 

The issue now goes to the individual countries for approval, with the caveat being approval is necessary to secure aid.  This was clearly meant for Ireland, which may need to hold a referendum for approval.  Of note, French approval may appear more controversial as well, following Sarkozy's indication that approval may be possible only after the election.  The Socialist candidate Hollande leads Sarkozy and that gap may widen in light of the VAT hike Sarkozy announced over the weekend.  Hollande has advocated re-negotiation of the agreement. 

Personal consumption expenditures were softer than expected in the US yesterday for the month of December and this pattern has been repeated in Europe.  French household consumption as expected to have risen 0.2% and instead it fl 0.7%.   Germany retail sales were expected to have risen 0.8% and instead fell 1.4%. 

While the PMI data has been showing some preliminary signs of stabilization, the real sector data remains largely disappointing, though Germany did report another decline in its unemployment queues (34k decline in January after a 25k decline in December). 

Household spending was also weak in Japan, falling 1% in December compared with expectations of a 0.2% increase.  This follows a 1.3% decline in November.  However, the larger focus as on the stronger than expected industrial production figures.  Industrial output jumped 4% rather than the 3% the consensus had anticipated.  The expectation for January was cut to 2.5% from 3.4% and the preliminary estimate from Japanese producers for February is 1.2%.  The Nikkei snapped a 3-day losing streak by eking out a minor again of 0.1%.  

Japan's PMI is not as closely watched as in other countries, but it edged higher in January to 50.7 from 50.2.  Separately, the unemployment rate unexpectedly rose to 4.6% from 4.5%, the highest since July, even though the job-to-applicant ratio improved. 

In terms of the price action, the dollar edged down to its lowest level since Oct 31 when the BOJ launched a massive intervention operation.  The low today is about JPY76.18.  Seeing how the dollar was flirting with its 200-day moving five days ago above JPY78, the market is understandably cautious about taking the dollar below JPY76.00. 

The price action reaffirms key support for the euro in the $1.3080 area.  An inside day is being recorded, but the resilience of the euro is notable.  On the day, the $1.3160 area should be pivotal.  As long as it remains above there, the risk is new highs.  The $1.3250 area is thought to contain the next batch of stops.