European Brinkmanship Means No Deal Today or Tomorrow

The Eurogroup meeting today and the heads of state meeting tomorrow cannot resolve the standoff with Greece. The logic of each side demands negotiating until the very last minute as the only way to ensure that the most is achieved.  Of course, the nature of the brinkmanship exercise risks a miscalculation that sends both over the abyss.  Meanwhile the lack of contagion emboldens the creditors while fresh off the electoral victory and vote of confidence emboldens the new Greek government.  

Just as the Greek financial crisis of 2010-2011 proved to be the proverbial canary in the coal mine for the broader European debt crisis, it is Greece's role now.  It is the first anti-austerity party to come to power in Europe, but it is unlikely to be the last.  It is also the first challenge from the political left.  Up until now the threat has come from the political right.  

Europe is in another brinkmanship exercise with Russia over Ukraine.  There is a window of opportunity at today's summit with Germany, France, Ukraine and Russia.  At issue is how much Europe is willing to concede to Russia Ukrainian sovereignty in exchange for  preventing an escalation of the conflict. Appreciating that Russia continues to occupy parts of Georgia, supports an "autonomous" region in Moldova, and tries to intimidate the Baltics, a potential settlement in Ukraine is unlikely to alter Putin's revisionist approach (revising borders and post-WWII territorial settlements).    

Merkel is widely  perceived to be among the most astute politicians of our generation.  She is a tactician par excellence.  The trade-off, however, is the lack of broad vision.  The European project remains an elite enterprise and European officials, including Merkel, have largely failed to offer a vision of why an integrated Europe is important for the average person and household.  Officials have failed to articulate a vision of Europe in a world that is frankly less Euro-centric than it has been in a millennium.   This leaves Europe in general, and monetary union, in particular, with shallow roots and vulnerable to changing winds.  

Without much economic data today, numerous bond auctions in Europe are drawing attention.   Switzerland sold 10-year bonds today with a record low yield of 11 bp.  The previously sold 10-year benchmark issue yields -2 bp (having fallen to -30 bp in late January).  Sweden sold a 5-year bond with a nominal yield of -5 bp.  The bid-cover was more than 3x.  The Riksbank meets tomorrow, and the risk is of a small 10-15 bp cut in the repo rate, which now stands at zero.  Germany sold 2-year bonds with an average yield of -22 bp. A similar auction in January produced a yield of -11 bp.  The bid-cover was unchanged at 1.89; the highest since last September though the fraction retained by the Bundesbank rose to almost 20% from closer to 18% of the previous four auctions.  

Norway has the only important macro-economic data today in the form of Q4 GDP.  It rose more than expected at 0.9% compared with consensus expectations for a 0.6% expansion of 0.5% in Q3.  The mainland economy, more important from a policy making point of view, grew 0.5%.  However, the downward revision in Q3 to 0.1% from 0.4% has deterred participants from giving up ideas of a possible March rate cut. 

The Canadian dollar was  crushed yesterday, falling nearly 1% against the US dollar.  It is consolidating yesterday’s losses today but is vulnerable to more losses.  A move today above CAD1.2630 would likely signal a move toward the January high near CAD1.28.  Bank of Canada officials underscored the vulnerability of Canada and the stretched household finances to the weakness in oil prices.   When the Bank of Canada surprised many by cutting rates in January, it couched it in terms of an insurance policy.  Comments yesterday by Poloz and Wilkins showed the door was more than a little ajar for additional insurance the next time the central bank meets in early March.   Moreover, the comments underscored the link between oil prices and the outlook for the Canadian economy.  

In the US, the focus is on tomorrow’s retail sales.  While the headline will likely be depressed by the fall in gasoline prices, and we already know there was a slight slowing in auto sales, the core measure, should reverse the 0.4% decline in December.  At the same time, the recent trade and inventory data is spurring economists to cut Q4 GDP estimates toward 2% or just below.  However, the strength of the labor market and the recovery in hourly earnings, has seen ideas of a mid-year rate hike strengthen, and this has been encouraged by several Fed officials that have spoken this week.