Markets look with concern to Tuesday’s vote
What happened overnight
– Eurogroup ministers delay €12bn loan disbursement to Greece
– Japan trade balance falls further in deficit territory
– Hungary Monetary Council likely to keep rates on hold at 6.00% today
– US FOMC and Bernanke are unlikely to signal new policy measures
Markets switched back to risk-off mode overnight, as Eurogroup finance ministers failed to commit to the planned €12bn loan disbursement in the absence of a firm agreement by Greek authorities on the austerity plan. All currencies, with the exception of the Swiss franc, are softer against the USD. AUD is the worst-performing currency against the dollar today at 1.053, having almost entirely reversed its Friday gains. EURUSD posted a smaller decline overnight, hovering around 1.4325, as peripheral spreads widened on the news from the Eurogroup summit. Equities sold off in Asia and in Europe, and S&P500 futures are 0.4% weaker on the day.
The Eurogroup statement did not bring new information to the table. The intention to not commit to the loan disbursement until Greece passes the planned austerity measures had already been stated over the course of the past few weeks by several members of the group. The market’s concerned response to the statement reinforces the focus on tomorrow’s confidence vote for Prime Minister Papandreou’s new government. If successful, the vote of confidence would boost expectations of the Greek parliament passing the austerity plan on 28 June. We expect markets to remain on the cautious side even in the event of a successful confidence vote. Furthermore, this week’s PMI data in Europe is likely to surprise to the weak side, mirroring the slowdown observed in May in the US. We believe this would contribute to keeping EURUSD under pressure in the near term. Our technical analysts see risks skewed to the downside for EURUSD, aiming for support at 1.4125.
Italian industrial orders disappointed for April with a 6.4% mom fall, larger than the 4.0% mom fall expected by the market. While industrial production in April held up well, the softer orders suggest we could see some weakening next month. Moody’s warned on Friday it was placing Italy’s long term rating on review for a potential downgrade pointing to structural challenges to growth and high debt levels. Contagion from Greek crisis remains a concern, but we note Italian 10-year bond spreads to Germany have been holding at relatively stable levels so far.
NZD: Good current data, current account revisions. The Performance of Services Index rose to 52.8 in May from 52.6 in April, the highest since September last year. Growth in manufacturing slowed to 1.9% qoq sa in Q1 from an upwardly revised 3.7% in Q4 2010, clearly affected by the earthquake in the South Island. Finally, the New Zealand statistics department has said it is going to strip insurance remittances associated with the September and February earthquakes out of New Zealand’s current account data. This implies much lower numbers than the market has been expecting.
THB: Smaller trade surplus. Thai exports rose a larger-than-expected 17.6% yoy in May vs the consensus forecast for 15.6% yoy. But the trade balance only registered a small surplus of $0.3bn as imports also exceeded expectations and rose 33.8% yoy. The recent fall in crude oil prices should help to ease the import bill and support the trade surplus. But with the political situation still fluid ahead of the general election in July, the room for a THB rally when risk appetite rebounds will likely be limited.
What to watch for this week
EUR: All eyes on Greece. The Greek government faces a vote of confidence on Tuesday evening in Athens. While most analysts seem to be cautiously optimistic that the government will survive, a no confidence result would trigger a 30- to 40-day countdown to elections and throw into doubt the IMF/EU’s willingness to disburse the €12bn aid tranche expected in July. Even if the government does survive this week, a degree of uncertainty will remain heading into next week’s (28-30 June) key parliamentary vote on proposed new fiscal austerity measures.
Negotiations on a new support package to cover a projected 2012 funding gap will also continue. The Eurogroup finance ministers meet Monday in preparation for a leaders’ summit on Thursday and Friday. This week’s meetings had been seen as the likely forum for finalizing plans for the new support package, including agreement on the nature and degree of private investor participation. However, recent indications have been that conclusive agreement may not be reached this week. Reports have indicated that the IMF is likely to release its July tranche even without firm agreement on the 2012 package, taking some of the immediate time pressure off policymakers to finalize a solution at this summit.
We expect EU policymakers will ultimately arrive at a systemically friendly solution to the Greek funding crisis. However, with uncertainty likely to linger beyond this week’s events, potential for the euro to rally against the dollar is likely to remain constrained and we think EURCHF may retest levels below 1.21.
Data may also be unsupportive this week. Our economists forecast the aggregate euro area PMI to fall to 54.5 in June, below the consensus forecast of 55.2. The German Ifo survey is also likely to fall, with our economists forecasting a two-point decline in the expectations component to 105.4, below the consensus forecast of 106.3. The headline is likely to moderate to 113 from 114.2. A fall in the data below our expectations could warrant a re-evaluation of our GDP forecasts, according to our economists, and add to global growth concerns.
USD: FOMC on hold. We expect the FOMC statement to continue to signal “exceptional low levels for the federal funds rate for an extended period” on Tuesday, with limited changes from the previous statement. The FOMC will release the statement at 12:30pm EDT, followed by Chairman Bernanke’s press conference at 2:15pm EDT. We expect the chairman to acknowledge the recent deterioration in US data but to maintain that the soft patch will be temporary, in line with the core message of his 7 June speech. We think it is still too early for Bernanke to entertain the idea of a QE3 program.
On the data front, our economists forecast durable goods (due on Friday) rebounded 0.5% mom in May and rose 1.0% mom on the core following the disappointing April reading. This would still not completely reverse last month’s weakness. While we look for improvement in US data in the weeks ahead, we think the run up to the ISM release at the end of next week will see concerns about US activity remaining elevated and we have opened a tactical short CADJPY position in our cash model portfolio, hedging our strategic long positions in EURUSD and AUDUSD.
GBP: Unchanged MPC balance. In the UK, we expect the minutes of the June MPC meeting due on Wednesday to show a 7-2 vote for rates on hold. The balance of speeches made by MPC members does not suggest any change in the MPC’s dovish stance. In fact, Paul Fisher recently noted that he still has an open mind about doing more QE. The interesting feature will be Ben Broadbent’s vote, as this was his first on the MPC. He appeared evenly balanced in his recent speech, and we do not expect him to have joined the hawkish camp in the first meeting. We expect Weale and Dale to have voted for a rate hike and Posen to have voted for further QE. We continue to forecast a rise in EURGBP to 0.91 in the late summer, as concerns over Greece moderate and the BoE remains dovish.
CHF: Focus on mortgage growth. In its latest monetary statement, the Swiss National Bank (SNB) highlighted the risk of overheating in the real estate sector. We think an acceleration in mortgage growth to meaningfully above its recent trend rate of 5% yoy would lead markets to return to expecting monetary tightening. If the SNB decides it needs to respond to property market strength we think it would work with the financial markets regulator, FINMA, to impose new macro prudential measures rather than interest rate hikes..
NOK: On hold. We expect Norges Bank to keep rates on hold at 2.25% on Wednesday. The accompanying statement should be fairly balanced and along the lines of the May policy statement, with the central bank juggling between the upturn in the economy that “has gained footing” and low inflation. The Norges Bank’s latest Regional Network Survey (the Norges monitors this very closely) suggests that the growth outlook remains robust.
More importantly, the survey shows that the estimate for wage growth in 2011 was revised up one-half percentage point to 4%. This supports our economist’s expectation for an upward revision in the central bank’s inflation forecasts. However, given the ongoing global slowdown fear as well as the fall in interest rates abroad, we think that the Norges Bank is unlikely to make any upside revision to its interest rate path.
The NOK has held reasonably well during the recent pullback in risk and retracement in crude prices. However, we doubt the ability of NOK to continue to perform well in the event of further risk liquidation. Our short-term model for EURNOK forecasts EURNOK at 7.96 based on the current level of oil prices, interest rate spreads and VIX.
CZK: On hold. The Czech central bank (CNB) is widely expected to keep rates on hold at 0.75% at its meeting on Thursday. While inflation rose 0.5%mom in May, CNB comments indicated very little of that was domestically driven. Our economist expects inflation pressures to remain subdued for most of the year, which should leave CNB at best only matching ECB rate hikes. Without interest rate support and constrained by the current account deficit, we remain neutral on the Czech koruna.
TWD: Resilient export orders and industrial output. Export orders, due today, likely rose to 11.3% yoy in May from 10.1% yoy in April, slightly higher than the consensus forecast for 11% yoy. Our economist also forecasts industrial output, out on Thursday, rose to 8.7% yoy in May, much higher than the consensus forecast for a fall to 4.6% yoy from the 6.9% yoy print in April. But with inflation still tame, we think Taiwan’s central bank will focus on protecting export competitiveness and fade any rapid TWD appreciation.
SGD: Moderation in inflation and output. Our economist forecasts Singapore CPI inflation, due on Thursday, moderated further to 4.0% yoy in May from 4.5% yoy in April, broadly in line with the consensus forecast. This would still be at the top of Singapore’s central bank’s (MAS) 3-4% forecast range for the year. We also expect industrial production, out on Friday, fell 18.3% yoy in May, much weaker than the consensus forecast for -7.2% yoy largely because of volatility in the biomedicals sector and supply chain disruptions associated with Japan. Nonetheless, we expect the MAS to keep the SGD nominal effective exchange rate (NEER) on an appreciating path and would view dips in the NEER towards the mid-point of the policy band as an opportunity to put on SGD longs.
MYR: Inflation grinding higher. CPI data out on Wednesday are likely to show inflation nudged higher to 3.3% yoy in May, broadly in line with the consensus forecast. The rising inflationary environment and robust credit growth should lead Malaysia’s central bank (BNM) to tighten policy at the next meeting on 7 July. We also expect BNM to allow some MYR catch up when risk appetite and exports pick up later this summer. We continue to target USDMYR at 2.93 in three months.
What to read – new reports
CNY: Rising debt threats. Our China equity strategists argued in the latest China Market Strategy that the credit overhang in China is much larger than expected. They think this would limit the room for an easing of credit conditions even if inflation plateau.
CNY: Slower Chinese growth. Our economist thinks elevated inflation and continued policy tightening point to a further slowdown in Chinese growth ahead. He has revised down his forecast for China’s GDP growth to 8.7% for 2011 from 8.8% previously and more importantly, to 8.5% in 2012 from 8.9% previously.
JPY: Japan macro flash. Our Japanese economists argue that while Japan’s energy imports will remain high, the pace of increase will be limited due to an insufficient number of power stations to keep up with potential demand. In the near term, this suggests limited scope for a further increase in the demand for and price of Australian and Indonesian natural gas and coal exports.
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Credit Suisse
FIXED INCOME RESEARCH & ANALYTICS