Busy Day: Three Down, Three to Go

Today is a busy day.  There are six main events for global investors.  Three have already taken place:   The BOJ meeting, Chinese data and the UK labor report.  Three highlights remain: Greek parliament vote, Bank of Canada meeting, and Yellen's semi-annual testimony.  

The Greek parliament must pass pension and tax reform measures today.  Although Tsipras is likely to suffer defections from Syriza, the three main opposition parties with 106 votes in the 300-seat parliament have united to support the reforms.  Syriza and its junior coalition partner have 162 seats.  Even if the Syriza defections double from the earlier motion to accept the reforms to 35, there is still a comfortable majority to approve the measures.  

The new wrinkle in the Greek drama is that the IMF seems to be hardening its stance:  "Greek debt can only be main sustainable through debt relief measures that go beyond what Europe has been willing to do."   If the IMF would have insisted on this back in January-February much time, money, and retching of the social fabric might have been avoided. 

In some ways, this is one of the consequences of the Greek referendum.  It has exposed the fissures among the creditors and within Europe.   It also brought debt relief into the conversation. And if our analysis is right, Greece will once again act as the midwife to the institutional evolution of Europe.  The debt overhang in Greece is not resolved yet. The larger debt overhang in Europe also remains unresolved. 

Following the Greek parliament vote, the ECB will meet to discuss the ELA.  The re-opening of the banks requires liquidity provisions.  The Finance Ministry has indicated that the banks will not re-open tomorrow.  Even after the banks re-open, capital controls will remain. 

The Bank of Canada meets today.   The weakness of early Q2 has prompted greater speculation of a rate cut, which would be the second one of the year.  The renewed drop in oil prices does not do Canada any favors.     The derivative markets suggest a 50/50 call.  We warn of the the risk of a seemingly perverse reaction in the foreign exchange market.  A rate cut may see the Canadian dollar rally as it would be seen as the last cut, and some momentum traders see the US stalling near its old nemesis, CAD1.28.  The failure to deliver a rate cut would simply push out the expectation and could continue to weigh on the Loonie.  

Yellen likely tipped her hand in the speech at the end of last week.  The FOMC expected the headwinds in Q1 to be transitory, and the economy has rebounded in Q2.  The pace of growth appears to be a bit below trend, but the labor market continued to absorb the slack.  If this continues, the Chair, who says her own views are near the FOMC's central tendencies (making her a centrist on the Board), expects the Fed to raise rates later this year.    Greece and China pose some risks.  While those events should be monitored, policy is driven by domestic considerations.

The US reports PPI, industrial output and the Fed releases the Beige Book.  The July Empire State manufacturing report will also be released.  These may pose some headline risks, but do not have the heft to have a lasting impact. 

The Bank of Japan policy is on hold.  As expected it shaved this fiscal year's growth to 1.7% from 2.0%.  It also pared its inflation forecasts.  This year was taken down to 0.7% from 0.8%.  Next year's forecast was shaved to 1.9% from 2.0%.  The FY2017 forecast was left unchanged at 1.8%.  Nowhere does the BOJ project hitting its inflation target.   Yet Kuroda gave no hint that more QE is being considered. 

China’s data was better than expected.  June retail sales rose 10.6% after 10.1% (consensus 10.2%).  Industrial output rose 6.8%.  The market had expected a small decline from May’s 6.1% pace.  GDP in the second quarter was 7.0% year-over-year.  This is unchanged from Q1 and better than the 6.8% consensus forecast.  To argue about the precision and accuracy of Chinese data is to belabor the obvious. 

Chinese shares fell today with the Shanghai Composite falling 3% and Shenzhen falling 4.2%.   This is the second consecutive drop.   Reports indicate that 700 issues remain closed, while another 1240 fell the 10% daily limit.    Margin use rose for the third day.   

The UK employment data disappointed.  The claimant count rose by 7k instead of fall by 9k as the market expected.  The 6.5k decline in May was revised to show only a 1.1k decline.   In Q1, the average monthly decline in the claimant count was 28k.  In Q2 it is 600.   The unemployment rate ticked up to 5.6% from 5.5%.  The focus has been on the average weekly earnings, which are reported with an extra month lag.  In May, they rose 3.2% (3m year-over-year), up from 2.7.  This was just below what the market expected.   

Sterling has enjoyed a good bounce in recent days, rising from $1.5330 last Wedensday to $1.5675 today.  It is finding initial support now near $1.56 but a break could see another quick half cent move as momentum traders take some profits.   The euro has been sidelined into a little less than half a cent range so far today, well within yesterday’s range.    While the market still seems inclined to sell into even small euro bounces starting near $1.1050, the downside has proven resilient as well.  The dollar is also within yesterday’s range against the yen.  It has taken out the downtrend line from early June (now a little below JPY123.  The five-day moving average is set to cross above the 20-day average.  The next immediate target is JPY124.00-40. 

 disclaimer