Deal Approaching

A Greek deal seems to be gaining momentum; Norway CPI is surprisingly elevated, casting doubts on more easing by Norges Bank, the UK trade deficit has narrowed while India and Mexico report May IP.

  • A Greek deal seems to be gaining momentum; but the real question still seems to hinge on debt relief
  • Norway CPI was surprisingly elevated, casting doubts about more easing by the Norges Bank
  • The UK trade deficit narrowed to the lowest level since mid-2013
  • India and Mexico report May IP

Price action:  The dollar is mostly softer against the majors as a Greek deal seems within reach.  The Norwegian krone and the euro are outperforming on the day, while the yen and the Loonie are underperforming.  The euro is trading around $1.1150, while sterling is trading just below $1.55.  Dollar/yen is trading near 122.50.  EM currencies are broadly firmer, with HUF, RUB, and ZAR outperforming.  INR and THB are underperforming.  MSCI Asia Pacific rose 0.5%, up for the second straight day.  The Nikkei fell 0.4%, while the Shanghai Composite posted a 4.5% gain, but with many Chinese stocks still not trading.  MSCI EM is up 1.2%.  Euro Stoxx 600 is up 1.7% near midday, while S&P futures are pointing to a higher open.  Global bond markets are mixed, with 10-year yields in core Europe up 6-10 bp.  Greek 10- year yields are down nearly 350 bp while other peripheral yields are down 10-15 bp.  The US 10-year yield is up 3 bp to 2.35%.

  • A Greek deal seems to be gaining momentum, with EU officials saying that discussions will take place on Saturday and that a summit on Sunday may not even be needed.  Separately, the Greek parliament will debate the submitted proposals today.  Press is reporting this would be at the committee level, with a full debate and vote possible tomorrow.  Markets are trading as if this is a non-issue, perhaps an exercise by Tsipras to try to give an air of legitimacy to his proposals.  The far-left wing of Syriza may break off in protest.  This is because the new proposal is very similar to the one creditors have demanded, but rejected by Greek voters (including cuts to pensions and tax increases).  So in the end, it looks like Greeks voted “no” but Tsipras is acting as if it were a “yes.”
  • The real question seems to hinge on debt relief.  As we have argued before, debt relief for Greece will happen; the question is in what shape.  A classic haircut seems out of the question, but even there, it seems as if Germany is softening on this issue, albeit marginally.  German Finance Minister Schaeuble admitted that the IMF was right to say that the current burden of debt in Greece is unsustainable.  About restructuring, he said he is “more cautious on this than Michel Sapin [French Finance Minister].” This sounds encouraging, or as encouraging as one can expect from the Germans at this point in the negotiations. It also exposes the already well demarcated difference in views between France and Germany.  For example, French President Hollande was quoted today as saying that the new proposal was “serious” and “credible.”
  • The euro has pushed to its highest level since June 30 on Greek optimism, trading as high as $1.1180 ahead of the North American open.  Yet we are still in the familiar $1.10-1.15 trading range.  A break above the $1.1240 area is needed to signal a test of the June high near $1.1435.
  • Norway CPI was surprisingly elevated, casting doubts about more easing by the Norges Bank. Inflation came in at 0.3% m/m (expected -0.4%) and 2.6% y/y (expected 2.0%).  Core inflation was also elevated.  That said, the biggest contributor to the surprise was an 18% increase in airline tickets, so policymakers could look through it.  The Norwegian krona is by far the outperformer today, up nearly 2% against the dollar during the London morning.  But we note that half of the gains happened prior to the CPI release, likely driven by the broadly weaker dollar and higher oil prices.  Yields are up as much as 6 bps at the back end of the Norwegian curve.
  • There were some notable surprises in today’s data out of UK.  First, the trade deficit narrowed to the lowest level since mid-2013, to -£393 mln.  For comparison, the average over the last five years has been -£2.7 bln.  This suggests that the external sector should be a source of surprise in growth figures.  Exports to the eurozone rose by 3.3%, led by shipments to France and the Netherlands.  Second, construction output came in well below expectations, falling -1.3% m/m against expectations for a +0.8% increase, but we note this is an especially volatile data series. Indeed, recent housing price data do not suggest any slowdown in the sector.
  • Chinese indices are up sharply again today. The Shanghai Composite is now up about 10% over the last two sessions combined, the biggest two-day rally since 2008.  Over 600 companies were limit-up today.  The drivers are pretty clear, including regulatory support, industry pledges, threatening short-sellers, prospects of additional liquidity injection, and propaganda to improving sentiment via government-backed media.  Yet it’s worth noting that nearly half of the mainland stocks still are not trading due to curbs.  Until those curbs are dropped, the price action is not giving a true indicator of investor sentiment.
  • Despite the heightened volatility in China’s equity markets, the yuan has been kept remarkably stable.  The PBOC fix for USD/CNY has been between 6.11-6.12 for the better part of May-June-July, which is close to the year’s low near 6.1079 in mid-May.  This makes sense.  With foreigners potentially heading for the exits, it’s best to lower expectations of currency depreciation, since that would encourage even greater outflows.  We think policymakers will favor a largely stable exchange rate for the time being.
  • During the North American session, the US reports May wholesale inventories.  Fed’s Yellen and Rosengren both speak.  Canada reports June jobs data, with -10k expected after +58.9k posted in May.  Breakdown will be important, however.  Last month’s gains were well-balanced, with full-time jobs up 30.9k and part-time up 27.9k.
  • India reports May IP, expected to rise 4% y/y.  The recovery continues, while low price pressures argue for further easing.  RBI next meets August 4.  If the monsoon season looks OK then and price pressures remain low, we think the easing cycle will continue then with another 25 bp cut in the policy rates.
  • Mexico reports May IP, expected to rise 0.5% y/y vs. 1.1% in April.  Mexico just reported June CPI up 2.87% y/y vs. 2.88% in May.  With inflation below the 3% target and the economy sluggish, Banco de Mexico will be hard-pressed to deliver a rate hike this year.  We see steady rates for the time being.