Keep watching Greece

Genevieve Signoret

Macro Views

Coming up

Market uncertainty is being fueled by Greek debt negotiations, the upcoming March FOMC meeting and congressional testimony and a press conference by Janet Yellen, the strange flatness of the U.S. yield curve in the face of Fed and professional forecaster projections for a June rate hike in June, and the direction and momentum of oil prices.

We expect that, ultimately, Greece and its creditors will reach a new agreement. Although we recognize the risk of a Greek exit from the euro area, we see it as tiny.

We think that the FOMC will delay a rate hike to the second half of 2015 but see a large risk that it does not and are positioned in the market for that risk.

We hypothesize that the U.S. yield curve is so flat because international investors are strongly attracted to the dollar in anticipation of a Fed hike and its expected impact on exchange rates (this has been a self-fulfilling prophecy); and to U.S. Treasuries versus U.S. risk assets, because uncertainty is especially high. But they’re averse to the short end of the curve given their view that the Fed will hike this year.

We have revised up a bit our outlook for oil prices in 2015. We now expect Brent crude to have stabilized around $50/barrel by December.

U.S. markets will be closed on Monday.

Last week

The Greek drama continued last week with the Greek parliament voting in favor of ending austerity and the Eurogroup failing to reach an agreement. The ECB provided another €5bn in emergency loans (ELA) to banks in Greece last Thursday 12 February. Next Monday, a deal might be reached at the Eurogroup meeting in Brussels. If negotiations fail on Monday, the ECB might vote not to extend the ELA program; such decision would “require the imposition of capital controls to stop deposit outflows and capital flight out of Greece”, according to Barclays$.

A new ceasefire for Ukraine was agreed in Minsk. Vladimir Putin announced a new ceasefire in Minsk after long negotiations between Ukrainian President Petro Poroshenko, Angela Merkel, and François Hollande. We take this news with skepticism given Putin’s history and intensified fighting in south-eastern Ukraine on Friday. The U.S. president reserved the right to arm Ukraine if diplomacy fails.

We read in the Bank of England’s (BoE) Quarterly Inflation Report an optimistic tone, confirming our views of a gradual tightening cycle starting next year.

We found the Banxico minutes to be dovish and hold to our view that Banxico will leave rates unchanged till after the Fed makes it first move—in our central scenario, in the second half of 2015. We forecast 3.75% for Banxico by December 2015.

Euro area GDP growth accelerated to 0.3% q/q in Q4 from 0.2% in Q3. German growth was particularly strong, accelerating to 0.7% q/q from 0.1% the previous quarter. The data is not all rosy though. Activity in France continued to slow down, in Italy it barely moved, and in Greece growth was negative again. India was growing faster than China in the fourth quarter of 2014: 7.7% compared with the same quarter the year before, versus 7.6% for China.

U.S. core retail sales, which exclude gasoline and auto parts, accelerated on trend in January to a healthy 4.6%.

Industrial production (IP) recovered in Mexico and Turkey, in the UK it continued losing steam, and in the euro area it contracted less quickly. In Mexico industrial production grew 3.0% in 2014. Mexico’s IP trend continued to build momentum in Q4.

Chinese annual inflation slowed down to 0.8% in January from 1.5% the previous month.  China’s central bank will probably add more stimulus soon.

The next two weeks

Events in red are those most likely to shake markets.

During the week

• Greece: Debt negotiations. We expect, ultimately, a new agreement. Although we recognize the risk of a Greek exit from the euro area, we see it as tiny.

Monday 16

• Japan: GDP (Q4). Since the VAT hike, Japan’s GDP has been contracting. We expect Q4 data to show recovery. Consensus: 0.9% q/q (from –0.5% in Q3).
• Euro area: Eurogroup meeting in Brussels, international trade.
• USA: President’s day: markets are closed.

Tuesday 17

• Korea: Monetary policy meeting. Consensus: no change at 2.00%.
• UK: Consumer prices (Jan).

Wednesday 18

• Japan: Monetary policy meeting, international trade (Jan). In its last meeting the Bank of Japan left unchanged its monetary policy rate and its asset purchase program. We expect the same thing to happen on Wednesday. Consensus and TransEconomics: rate and asset purchase program unchanged.
• Euro area: ECB decision as to whether to extend ELA. See comments above.
• UK: Monetary policy meeting minutes (Jan), unemployment rate (Dec).
• USA: Industrial production, Fed speech: Powell (FOMC voter), monetary policy meeting minutes. IP consensus: 0.4% m/m (from –0.1% in Dec).
• Mexico: Banxico Quarterly Inflation Report.

Thursday 19

• USA: Unemployment claims (14 Feb).

Friday 20

• Global: Manufacturing PMIs.
• Mexico: GDP (Q4), economic activity index (IGAE).TransEconomics: 2.5%; consensus: 2.7% y/y (from 2.2% in Q3).

Monday 23

• Japan: Monetary policy meeting (Jan 20–21).
• Mexico: Retail sales (Dec).

Tuesday 24

• Euro Area: Consumer prices (Jan, final).
• Turkey: Monetary policy meeting.
• USA: S&P/Schiller house price index, consumer confidence.
• Mexico: Consumer prices (1H Feb).

Thursday 26

• Euro Area: Money supply (Jan).
• USA:Unemployment claims (21 Feb), consumer prices (Jan), durable goods new orders (Jan), FHFA house prices.
• Brazil: Unemployment (Jan).
• Mexico: International trade (Jan).

Friday 27

• Japan: Consumer prices (Jan), unemployment rate (Jan), industrial production (Jan, flash).
• USA: GDP (Q4, second estimate).
• UK: GDP (Q4, second estimate).
• Mexico: Unemployment rate (Jan).