Greek Woes Deepen, Focus on US Jobs

Greece map

Greek woes have deepened as creditors make it clear there is no scope to resume negotiations after the referendum. While investors continue to mull developments, US employment data also comes into focus.

  • The official creditors have made it clear that there is no scope to resume negotiations with Greece until after the referendum
  • The capital controls only slow but do not stop the flight of deposits
  • With a soft weekly initial claims, employment gains in both the ISM and PMI manufacturing surveys, robust Conference Board’s Jobs Plentiful, we favor another strong jobs report
  • Sweden’s Riksbank was more aggressive than many expected
  • The Mexican peso hit an all-time low yesterday and continues to weaken today

Price action: The dollar is mostly firmer against the majors as Greek saga continues. The Norwegian krone and the euro are outperforming on the day, while the Swedish krona and the Antipodeans are underperforming as Sweden’s Riksbank delivered a dovish surprise. The euro is trading just below $1.11, while sterling is trading around $1.5600. Dollar/yen is trading near 123.50. EM currencies are mixed, with THB and INR outperforming. ZAR, MYR, and KRW are underperforming. MSCI Asia Pacific rose 0.1%, up for the third straight day. The Nikkei rose 1%, while the Shanghai Composite posted a 3.5% loss. MSCI EM is down 0.5%. Euro Stoxx 600 is flat near midday, while Greek markets remain closed. S&P futures are pointing to a lower open. Global bond markets are mostly lower, with 10-year yields in core Europe up 7-8 bp. Greece 10- year yields are down 20 bp while other peripheral yields are up 2-3 bp. The US 10-year yield is up 2 bp to 2.44%.      

  • The official creditors have made it clear that there is no scope to resume negotiations with Greece until after the referendum. There have been several polls published. They generally appear to show a shift toward the government’s position to reject the creditors’ demands (for a program that no longer exists) since the capital controls began biting. EC’s Juncker said that when Greece summarily left the negotiating table, the difference between the two sides was €60 mln.
  • Juncker suggested that the Greek government never really wanted a deal. Yet it seemed ill-prepared to deal with the consequences. The €60 ATM withdrawal limit has become in effect €50 euros because, according to reports, ATMs have quickly run out of €20 euro notes. Meanwhile, the access to pensions has been tightened. Last week, the government indicated pensions would be fully accessible. On Monday, they were limited to €240, and on Tuesday to €120.
  • While the Greek bank holiday is expected to last through next Monday, the day after the referendum, the risk is that it lasts longer. On a “no vote” it is clear that the ECB would not increase the ELA, but even on a “yes vote”, without an aid package, the ECB may also not be in a position to increase ELA immediately. In fact, on a “yes vote”, the economic and financial crisis will turn into a political crisis. Tsipras has indicated that he does not want to be the prime minister to implement the creditors’ program, even though as Juncker noted, he accepts most of it.
  • The capital controls only slow but do not stop the flight of deposits. The economy is collapsing. What was a liquidity crisis may be transformed into a solvency crisis, which would also limit the ECB’s ability to expand the ELA facility. There continues to be much talk about the significance of the debt payment due to the ECB on July 20. This seems to be still focusing on the sovereign debt obligations without appreciating the other sources of pressure that makes it unlikely that the situation can persist that long. There is a private sector obligation due earlier in the form of the JPY200 bln Samurai (~145 mln euros) that matures in the middle of July. This one, unlike the missed payment to the IMF, would likely be a credit event.
  • Even this risk is too far in the future. Consider how the government will pay the 600k public workers. There has been some indication that the government will issue IOUs, which some will see as the embryonic form of a new or parallel currency, though this was not the case when the previous Governor of California issued IOUs to pay the state’s obligations. We do not know how long the Greek economy can function without an operating banking system, but we suspect it is less than three weeks when the ECB payment is due. Moreover, it should not be forgotten that part of the Greek banks core capital was tax deferred assets, which can hardly be used to pay depositors. The Cypriot experience where depositors were bailed-in also fans fears.
  • While investors continue to mull Greek developments, the focus shifts to the US employment data. The Bloomberg consensus is for a 233k increase in non-farm payrolls, a decline in the unemployment rate to 5.3%, and 0.2% increase in average hourly earnings. The ADP estimate of private sector job growth was 237k. Its estimate has been below the BLS estimate in four of the past six months. The average of those four was 59k. That could point to a 296k increase compared with the Bloomberg consensus of a 225k increase in private sector jobs.
  • With a soft weekly initial claims environment, strong employment gains in both the ISM and PMI manufacturing surveys, robust Conference Board’s Jobs Plentiful Index (new cyclical high in June) favor another strong report. In Q1, US non-farm payrolls rose 586k. In April and May, it grew 501k jobs.
  • Separately, we note that yesterday’s construction spending report was behind the tick up in the Atlanta Fed’s GDPNow tracking model to 2.2% Q2 GDP. The consensus among the Blue Chip Forecasters is closer to 3.0%. However, even the more modest growth that the Atlanta Fed is tracking is consistent with additional absorption of labor market slack.
  • There are a few other developments to note today. First, Sweden’s Riksbank was more aggressive than many expected. It cut rates by 10 bp to -35 bp. Its bond buying program was expanded by SEK45 bln on top of the existing SEK80-90 bln. It also lowered its repo rate rather to -41 bp in Q4, which signals scope for another rate cut. The krona weakened in response, with the euro gaining a little around 1% at its best to a three-week high near SEK9.37.
  • Second, the UK’s construction PMI beat expectations, rising to 58.1 from 55.9 in May. The consensus was for a 56.5 reading. Of the three PMIs, the construction report covers the smallest part of the UK economy. Separately, Nationwide’s house price index showed an unexpected decline of 0.2% in June. The market has expected a 0.5% rise.
  • Third, the dollar bloc remains under pressure. A larger than expected Australian trade deficit (A$2.75 bln rather than consensus A$2.23 bln) undermined the Australian dollar. The continued fall in milk prices boosts confidence that the Reserve Bank of New Zealand will cut rates at the July 23 meeting. The market is leaning toward another 25 bp rate cut after that. The Canadian dollar has been sold off following the disappointing contraction in April GDP and the sharp drop in oil prices. This has spurred speculation that the Bank of Canada may need to cut rates again.
  • The dollar is mixed against the other majors. The euro had slipped through its 100-day moving average (~$1.1045) yesterday but found support just below there today. It continues to gyrate within the broad trading range established on Monday. Sterling was sold to its lowest level since June 16, but the selling momentum appears to have abated ahead of the US employment report. So far today, sterling has remained below its 20-day moving average for the first time since June 9. It is found near $1.5645
  • With the help of rising US 10-year yields and a recovery in the Nikkei, the dollar has continued to move higher against the yen. The dollar found good bids on the dip below JPY122 at the start of the week. We suggested then, and the subsequent price action supports the idea that this is the lower end of the range. The upper end of the recent range is seen in the JPY124.40-50 area, and a strong US employment report could see this approached.
  • The Mexican peso hit an all-time low yesterday. The poor performance of a currency that has for long been a darling for markets, at least from a fundamental point of view, has caught many participants on the back foot. There seems to be several drivers, including a more dovish central bank, softening of domestic data, and a worsening political environment. Most of these factors are likely to have run their course and should be priced in by now, but since MXN has a relatively higher liquidity and is more easily tradable (deliverable) than most other EM currencies, we think it will remain in the high-beta group for now. Fundamentally, however, we remain bullish on Mexico for the medium term. USD/MXN extended its gains overnight, making a clean break of the 15.80 level. The 16.0 level seems to be the next one to watch.