What happened overnight
– Greek government survives confidence vote with 155 votes
– June MPC minutes not possibility of renewed QE
– Sweden manufacturing confidence better than expected
The USD has gained ground broadly and risk sensitive currencies have weakened despite the survival of the Greek government. EURUSD was briefly marked as high as 1.4434 in the immediate aftermath of the confidence vote but then retreated and a subsequent early European session bounce stalled at 1.4420. Sterling is underperforming after a dovish set of MPC minutes, with EURGBP back above 0.89 fro the first time since June 10. Equity markets traded firmer in Asia, echoing the 1.3% rally on Wall Street, but European markets are all giving back some of Tuesday’s gains, with the S&P future off 0.4% and the Euro Stoxx 600 banks index down about 1%. The Spain-Germany 10-year spread is about 5bp wider. UK 2-year Gilt yields are down about 4bp on the day.
The Greek government survived the vote of confidence with all 155 governing MPs having voted for the government. This does not guarantee complete party discipline in the vote next week on new austerity measures, but it lends toward a positive outcome. .Markets had rallied into yesterday’s result so the “sell the fact” reaction to the news is not altogether surprising. Markets remain wary of the still-unresolved debate over private participation in a 2012 rescue package for Greece, not to mention the mixed news on the health of the global recovery. Still we expect markets to grow increasingly confident that a systemic shock can be avoided.
In the UK, the minutes of the June MPC meeting showed a 7-2 vote for rates on hold and a still very dovish Bank of England. As expected, Weale and Dale voted for a rate hike while Posen continued to vote for further QE. The new MPC member Ben Broadbent voted with the majority to keep rates on hold. Overall, the committee judged that the “downside risks to the prospects for medium term inflation had increased over the month”. As a consequence, some members thought “it was possible that further asset purchases might become warranted if the downside risks to medium term inflation materialised”.
With the rates market not pricing in a full rate hike until July 2012, we struggle to see much scope for a GBP to lose rate support. However, even at the current level of front end EUR-GBP rate spreads, our model says that EURGBP should be trading at 0.91.
In Sweden, the manufacturing confidence was unchanged at 11 in June, better than consensus and the other June surveys. Interestingly, even though the survey showed a slowdown in foreign orders, expectations remained fairly optimistic. Consumer confidence moved sideways to 17 in June. We think the underperformance of the SEK over the past month can be attributed to a combination of long positioning heading into the risk liquidation and the global growth slowdown fear. As we start to see signs of growth recovery and a pick-up in global industrial production momentum over the next couple of months (in line with our global strategy view), we expect the SEK to rally and outperform both the EUR and the NOK.
New Zealand’s current account deficit narrowed by NZD1.1bn (sa) to NZD1.8bn (sa) for the March 2011 quarter. But this was entirely driven by the NZD1.0bn fall in foreign investment income due to losses from foreign-owned insurance companies after the Canterbury earthquake.
What to watch for today
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” today, 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. It is probably still too early for Bernanke to entertain the idea of a QE3 program, in our view.
NOK: On hold. We expect the Norges Bank to keep rates on hold at 2.25%. The accompanying statement should be balanced and similar to the May statement, with the central bank juggling between the upturn in the economy that “has gained footing” and low inflation. Although the Norges Bank’s latest robust Regional Network Survey and recent rise in indicators for wage growth to 4% support our expectation for Norges to raise its inflation forecasts, the ongoing global slowdown and concerns about Greece are likely to prevent Norges from pushing up its forecast interest rate path.
Credit Suisse
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