Germany is leaving the door open for an agreement based on Greece’s latest proposal, according to media reports yesterday.
As expected, Greece requested a bailout extension by six months but there are still huge differences to be bridged. The reception by the European Commission was much warmer than the cold wind blowing out of the German finance ministry: “not enough details, no substantial progress.” It is still our base case that a solution will be found during the Eurogroup summit starting at 15.00 CET today. TheGrexit risk has increased, however.
The minutes from the ECB’s monetary policy meeting 21-22 January, when the QE decision was taken, didn’t bring much news, in our view.
US initial jobless claims continue to point to ongoing strength in the labour market. Thus, the 4-week average fell to 283k in the survey week for the February jobs report, down from 307k in January when payrolls rose 257k.
The regional gauge Philly Fed dropped more than expected yesterday, posting a decline to 5.2 in February from 6.3 in January. This was well below of a rise to 9.0. This suggests that the US manufacturing sector is continuing to slow down.
Day ahead
Today’s most important data release is the Euro area PMIs, which should give us a first indication of how business confidence in the monetary union has developed after the ECB’s QE announcement. In line with the consensus call we expect the composite PMI to rise to 53 in February from 52.6 in January, indicating a slight improvement of growth going forward (see chart below). We expect both services and manufacturing PMIs to pick up in February.
Also on the agenda are UK retail sales (10:30 CET) and the US Markit manufacturing PMI (15:45 CET).
Rates
With Greece finally submitting a request for an extension of its rescue loan facilities, one could have thought that the rollercoaster ride we have seen in Greek rates over the past month would be closer to an end. Instead, it would seem to be increasing. Initially intraday 3Y rates fell 230 bp following the Greek request.
Then after the German rejection of Greece’s extension proposal, rates started rising again almost eradicating the fall. The Greek 3Y rate ended at 16,7% down 33bp. Until we see an agreement set in stone expect continued volatility.
Intra-Eurozone the spill-over effect was classical with core and semi-core rates moving in the opposite direction of Greek rates. Though the movements were modest.
The FOMC minutes released Wednesday were judged as being slightly dovish, and on the day caused rates to fall. But the FOMC minutes are from January and markets have moved on, instead now awaiting Yellen’s congressional testimony on 24 February. Oversold conditions and fears of a less dovish Yellen paved the way for a bounce in US yields yesterday evening. The US 10y yield is 4bp higher at 2.11% from yesterday afternoon.
FX
EUR/USD has been governed by Greek headlines largely, with yesterday’s cold shoulder from Germany to Greece prompting a weaker EUR. Today’s PMI numbers should signal that the Euro- area recovery remains on track. This is EUR-positive if Euro-area assets are under-owned from an asset allocation perspective. Today we expect the pair to remain within recent ranges. The EUR should see some headwinds if we see positive steps in the Greek drama. Next week’s Humphrey-Hawkins testimony will be important, should Yellen be seen as hawkish after this week’s slightly soft FOMC minutes.
SEK: will today’s NIER sentiment indicators show a change in inflation expectations? According to the latest outcome, households see inflation at zero per cent over the next year. This indicates downside risks to the key inflation expectations survey released in March, which could be enough to trigger more SEK-negative Riksbank easing. Given the clear and present danger for further Riksbank easing, the SEK is a sell on rallies (~9.50/9.52) in the short term.
NOK weakened yesterday on delayed effects from lower oil prices. Since yesterday’s low however, oil prices are 5% higher which should imply some daily tailwinds for the NOK. The Norwegian surprise indices have eased somewhat though, and various momentum indicators suggest the NOK is losing some steam. The 2015 lows (EUR/NOK 8.53-8.55) have provided working resistance so far.
Nordea