Ten Observations To Start the Week

Currency in Crisis

1. The approval by the Greek parliament of the latest austerity package now shifts the focus to the Eurogroup meeting of finance ministers on Wednesday for their support. The new austerity proved too much for the Greek government and a cabinet reshuffle is needed. Political pressure will mount to set a date for the elections. The successful Greek vote helped the foreign currencies, but the yen and Swiss franc, recover from the pre-weekend slide.

2. With the ECB focused on liquidity provisions (another 3-year LTRO in two weeks and new collateral rules), and some data suggesting euro zone contraction is not accelerating, a rate cut is unlikely next month. Draghi himself offered a small word clue last week. He previously said there were “substantial downside risks”. Last week he dropped the “substantial” to say that there were “downside risks”.

3. US economic data reported last week points to a sharp upward revision in Q4 when it is released later this month (Feb 29). The BEA had assumed that wholesale inventories rose $17 bn in December and last week we learned they rose by $56 bln. The inventory build-up may not dampen Q1 growth prospects because they appear to be a recovery from the draw down in Q3. The trade figures may also be worth a couple tenths of a percentage point. Q4 GDP may come in 3.2% or a little higher after the preliminary estimate was for 2.8%.

4. US data in the coming days is expected to show that the growth momentum has been largely sustained here in Q1. Retail sales and industrial production figures will be robust for January while the Empire and Philly Fed surveys will give evidence that the momentum carried into February.

5. The US foreclosure settlement is likely to do two things. First, the pace of forecloses is likely to increase after falling by a third last year. Second, it will reduce the amount of money owed by as many as 1 million households. There is some talk that it could be a precursor to Fannie and Freddie writing down some mortgage principle.

6. US President Obama will present next fiscal year’s budget today. It is part of his presidential campaign. It will project the deficit falling from 8.5% of GDP this fiscal year to 5.5% in the fiscal year beginning in Oct. It will combine longer term deficit reduction with more immediate stimulus.

7. The Bank of England announced last week and extension of its asset purchases. By subtly changing the segments of the bond market, it will purchase more shorter term maturities and less longer term. Thus QE combines an element of Operation Twist. Tomorrow the UK reports Jan CPI and the risk to the consensus -0.5% forecast is to the downside as last year’s VAT hike drops out.

8. The BOJ two day meeting concludes tomorrow and although it is not expected to do anything, the press conference may be more revealing. Political pressure is mounting on the BOJ to do more to combat deflation. As a percentage of outstanding JGBs, it has bought around half as much as the BOE. GDP from the Oct-Dec quarter was reported earlier today and showed a larger than expected decline (-2.3% annualized vs -1.3% expected). The economy is expected to expand again in the current quarter, helped by the fourth reconstruction budget approved by the cabinet last week.

9. Sweden’s Riskbank meets on Thursday. The consensus calls for a 25 bp rate cut to 1.5% in the face of slowing growth and benign inflation pressures. Two new members of the board appear more appear somewhat more dovish. The Riskbank GDP forecasts may be cut and this may also fuel speculation for an April cut as well.

10. China’s vice President XI Jinping, who is tipped to be the next president, visits the US this week. The yuan reached a 18 year high last week ahead of the visit. The near-term constructive outlook for the euro also bodes well for the near-term outlook for the yuan. Meanwhile, the PRC is dealing with its own local government debt problem by encouraging banks to extend the maturities especially if there is a strong social interest or utility, such as high way construction, but not, say for a town square. Many of the local government loans were how the fiscal stimulus in 2008-2009 was delivered. An estimated third of such loans mature this year.