What happened overnight
– Reports indicate stress in IMF/EU talks with Greece
– Greece denies disagreement with EU
– Italian yields continue to rise, 10-year back above 5.2%
– UK construction PMI weaker than expected
EMEA currencies remain under moderate pressure and the CHF has strengthened as Italian and Spanish bond yields continue to rise. EURCHF has slid back to levels around 1.11 and EURUSD has tested as low as 1.4209. Equity markets are weaker across the board, with the Euro Stoxx 600 banks index off over 3% and the S&P future down 0.9%. German front-end yields are sharply lower such that the German-US 2-year government spread is now below 40bp for the first time since 11 August.
Concerns about the progress of Greece Troika meetings are the proximate cause of renewed stress. Yesterday, Reuters reported that Greece is overshooting its 2011 deficit targets and that its privatization plans are in doubt, and this morning press reports have indicated the IMF/EU team left Athens amid major disagreements with the government. The IMF/EU are due to disburse the next trench of funds from the aid program in mid-September and a breakdown in discussions would throw this disbursement into doubt.
Greece’s finance minister has denied disagreement this morning and said that a ten-day break in discussions had always been planned to allow the ministry to work on its 2012 budget. A more immediate problem for the euro and market sentiment is that the ECB has apparently been unable or unwilling to keep Italian and Spanish 10-year yields pinned around the 5% level achieved over the past two weeks, with 10-year Italian yields trading above 5.2% this morning. We expect the Troika will find a way to disburse Greek funds in September but continued ECB action to cap Italian and Spanish yields is critical to avoid a slide back into more severe systemic stress.
The UK construction PMI fell to 52.6 in August, down from 53.5 in July and below the consensus forecast of 53.2. This marks the lowest reading in seven months and together with weak manufacturing PMI yesterday points to further deterioration in economic activity in the latter half of the year. Nonetheless, we suspect data have yet deteriorated enough to push the BoE towards easing anytime soon and still see near-term risk skew to EURGBP downside as markets refocus on the European periphery and the possibility of ECB easing.
Singapore’s central bank (MAS) said late yesterday that inflation will likely remain above 5.0%yoy in the next few months on higher rental and car prices. This suggests that the current 4%-5% inflation forecast for 2011 would need to be revised up again, barring a global recession. We remain of the view that the MAS would have to maintain the current 5.5%-6.0%yoy SGD NEER appreciation even as external growth slows. We recognize the rising risk of a recession in US and European growth but believe that the MAS is only likely to shift to a neutral stance and not depreciate the SGD given structurally higher inflation. We remain short USDSGD in our cash recommendation portfolio.
What to watch for today
USD: Payroll day. Today’s US employment report should continue the recent run of “bad-but-not-necessarily-recessionary” data. Our economists expect the headline to read +5K, with private payrolls at a 40K due to a telecommunications strike. Excluding the strike, the data would read 50K and 85K respectively. This would be a reversal of last month’s surprise improvement to 117k after two prior months in the 50k range. Our economics expect a flat workweek, which would translate into a 0.1% labor income gain, but they warn that risks are to the downside and that even a 0.1 drop in hours is equivalent to losing 320k jobs from an income perspective.
Numbers in line with our below-consensus estimates would certainly not be “risk friendly” but we think the prospect for new Fed action in September is providing a bit of cushion against weak numbers for risk-sensitive currencies, particularly those not geared directly to US growth. It would likely take an outright negative reading on a post-strike basis to damage risk sentiment significantly, in our view.
What to do: EM FX Scorecard
The latest run of our emerging market currency model, the Scorecard, suggests being long the BRL, PLN and IDR and being short the PHP, TWD and HUF in September 2011. (See report here)
What to read today
– EUR: European Strategy and Trades. Our European interest rates strategy team reiterated their call for lower rates despite their low levels. The growth outlook has deteriorated further, and the political and financial situation in Europe remains highly uncertain. They also suggest buying 30Y Bunds and paying fixed in 30Y EUR swaps. See report here.
– Separately, our European economics team have published a note looking at the latest developments with respect to Greece. See the report here.
Click here to read the full report:
http://www.easyforexnews.net/wp-content/uploads/2011/09/document-804384540.pdf
Credit Suisse
FIXED INCOME RESEARCH & ANALYTICS