The US dollar is recouping some of yesterday's
outsized losses. The euro was unable to extend yesterday's push
toward $1.12, perhaps with the help of some fragile stability in the German
bund after yesterday's dramatic slide. Disappointing UK service PMI saw
sterling slide after briefly and narrowly taking out yesterday's
high. The dollar found a base near JPY123.80, from which has
returned to the JPY124.40 area. The yen's performance seems to be more a
function of cross activity today.
Over the last several months, Greece has made
several proposals to break the deadlock. The rigor, completeness, and
commitment may be questioned. The key point is that they were all
summarily rejected. Given that the previous conditions did not work and
the results of the Greek election, the official creditors did not offer a
mid-course correction to the strategy that they had foisted on Greece...until
today.
And even now, it has not come from the
Eurogroup of finance minister, but from the IMF, ECB and, it appears
Merkel. Ironically the Greek government was repeatedly referred
to the Eurogroup and was criticized for it end-run attempts.
The vast majority of the money Greece needs is
not to pay for government expenditures, but to service its debt, which is
largely in official hands. In effect, the creditors have said,
"Do what we say, or you won't be able to service your debt to
us." The precise details of the demands are not clear, but
some elements have apparently been leaked--though note Greece has been
criticized by other countries for taking its case to the media (not that it
found much sympathy there).
Greece is to run a large primary budget surplus
(~3.5%) over the medium term and must keep the pension fund out of deficit.
It appears that in exchange Greece would be able to re-purpose almost 11 bln
euros of unused funds that were to help recapitalize the banks. Those
funds could be used to pay the ECB the 6.7 bln euros due next month (in two
payments).
Greek bonds and stocks are rallying in
anticipation of a favorable outcome, but it will not be so easy. Greece's
will reportedly make a counter-offer. The more onerous the creditors'
demands, the more attractive a default/restructuring becomes. Greece and
Cyprus have restructured their debt within EMU, which creates precedent to some
degree, and, as is well appreciated now, there is no formal mechanism to eject
Greece, or any member, from the monetary union.
Questions about Greece will not doubt be
featured at the ECB's press conference. Draghi will likely recognize
that economic data is improving in the euro area--not only in terms of
aggregate growth, but also lending and prices. However, as he indicated
before, talk of an early exit from QE is premature. This is only
the third month in operation. Draghi will also likely be questioned about
what appears to be the lack of liquidity (different than volume) in German bunds
and the spike in volatility. He will likely be asked to the ECB's
intent to expedite its sovereign bond purchases before the slowing of
government issuance and thinner markets over the summer months.
Draghi will be cautious. The major
lifts for the eurozone economy, weaker euro, low interest rates and the drop in
oil all have at least partial reversed, and with it some economic
momentum. Germany's service PMI fell for the second month though at 54.0
is a little better than the flash (53.9). France's service PMI rose to
52.8 from 51.6 in the flash estimate. It peaked in February at
53.4. Italy came in at 52.5 after a 53.1 reading in April. Spain
fell to 58.4 from 60.3. The eurozone composite PMI eased to 53.6 from
53.9. This is below the 3-month average (53.8). It is likely
consistent with 0.3%-0.4% Q2 GDP.
The UK's service PMI fell to 56.5 from 59.5.
It is the lowest reading here in 2015. The composite fell to 55.8 from
58.4. It plays on fears that the UK economy may have peaked.
Sterling's losses have retraced nearly 61.8% of this week's bounce (at
$1.5250).
Australia reported better than expected
growth. Growth accelerated to 0.9% in Q1 form 0.5% in Q4 14.
This was a bit more than the market expected. However, the details were
poor. Domestic demand is weak. Growth was largely accounted for by
exports and inventory accumulation. The Aussie is holding its own in the
fact of the US dollar recovery. However, it lost the upside momentum
after trying to push the $.07800. Support is seen in the $0.7740-50
area.
The North American
morning features not only the ECB press conference but a slew of data.
The market generally looks for constructive news. This should include
a smaller trade deficit (consensus for $44.0 bln down from $51.4 bln in March)
and a tick up in the ADP employment estimate (200k after 169k in April).
The service sector ISM may be the exception, and it is expected to slip to 57.0
from 57.8. Later the Fed’s Beige Book will be released. Note that
the OECD cut its US growth forecast to 2% from the 3.1% estimate in March.
We expect the Fed to cut is central tendency forecast of 2015 growth from 2.5%
(2.3%-2.7%) to 2% when it meets later this month.
Getting Blood from a Turnip: Potential Greek Deal Overshadows ECB Meeting
Reviewed by Marc Chandler
on
June 03, 2015
Rating:
Reviewed by Marc Chandler
on
June 03, 2015
Rating:
