It’s a slow day for scheduled economic news, although the unscheduled headlines will continue to grab the crowd’s attention, courtesy of a certain macro tragedy unfolding in real time. As the markets struggle to figure out what comes next, keep an eye on EURUSD, which may rally if anything resembling a solution emerges from the ashes of the Greek debacle. Otherwise, the renewed appetite for risk-off trades is putting new pressure on the U.S. 10-Year yield. Meanwhile, the Fed minutes from the last monetary meeting will be closely read for fresh clues on evaluating the timing of the first rate hike.
EUR/USD: The uncertainty bound up with Greece has been weighing on the euro over the past month. The latest phase of weakness for the currency isn't surprising, given what's going on in Europe. But if the Greek crisis pulls back from the precipice, even slightly, will the Eurozone’s modest economic recovery (assuming it endures) take precedence once more in terms of stabilizing and perhaps driving EURUSD higher?
It's important to remember that before Greece stole the headlines, a modest rebound was (and probably still is) bubbling in the Eurozone. The EURUSD previously found a degree of steadiness when the upbeat numbers started arriving in early spring. The slide just below 1.05 in mid-March marked a trough, and one that still stands. But the bottom gave way to a rally through mid-May, just about the time that news about Greece began to deteriorate into what's become the current debacle.
The veil of uncertainty is sure to lift soon, however, although not necessarily for encouraging reasons. But one way or another, the end is nigh. "It is not a matter of weeks but of a few days" to keep Greece from a full-blown disaster, German Chancellor Angela Merkel said yesterday.
On that note, the next round of major Eurozone macro releases arrives next week, including the monthly update on industrial production, inflation, and the European Central Bank’s monetary announcement. The question is whether any of those events will be upstaged by the ongoing turmoil in Greece? The answer, of course, has little to do with economics proper at the moment and everything to do with the political headlines flashing across your screen.
U.S. 10-Year Treasury Yield: The much-anticipated rate hike is on hold… again. That, at least, is the market’s message to the crowd. This may be a reaction to the latest round of disappointments in the economic numbers, although Greece is a factor too.
Whatever the reason, the appetite for a safe haven is once again on the rise. After reaching a recent peak of around 2.5% last month, the benchmark 10-year yield has tumbled to roughly 2.2% yesterday, as of mid-day trading in New York. If the news from Greece gets worse, it’s likely that this key rate will slide even lower.
What about the prospects for the Fed’s rate hike in September? In the current climate, that’s looking unlikely. “Holding all else constant, the Greece crisis probably pushes out the first Fed Funds target increase past September,” predicted the director of economics at Huntington National Bank earlier this week.
Ok, then the single-biggest factor for predicting the 10-year yield is the fluctuating odds of a Grexit. A key support line is roughly 2.15%, which approximates the 200-day moving average for the 10-year yield. A break below this level would be read as a sign that the crowd’s anxiety (and demand for liquidity) has gone to the next level.
US: Fed Minutes (18:00 GMT) Amid the renewed uncertainty about the timing of the first Fed hike, today’s release of minutes for the previous monetary meeting will be widely read in search of fresh clues.
With Greece threatening to plunge the Eurozone into uncharted political and economic terrain, it’s unlikely that the Fed would start raising rates until a semblance of relative calm returns. But by some accounts, there’s more than just Greece pushing the Fed’s timing further down the road.
“There is a slim margin of error,’’ a portfolio manager at Invesco Ltd. noted yesterday. “Any shock will undermine the still low level of the global economic growth. It is time to preserve capital.”
Do the Fed's policymakers agree? Today’s minutes may offer a clue. In last month’s monetary statement, the Fed emphasized that the coming rate hike will be gradual, which is to say that the Fed wants to shift the market’s attention away from the timing of the tightening to the pace. We’re likely to see comments in today’s minutes that support that focus.
Meanwhile, today’s minutes come in the wake of yesterday’s IMF recommendation that the Fed should wait until “clear signs of wage and price inflation, and sufficiently strong economic growth before initiating an interest rate increase.”
It’s reasonable to argue that by that standard there’s still little if any support for launching the first rate hike since 2006. The question du jour when parsing today’s minutes: does the Fed agree?
Disclosure: Originally published at Saxo Bank TradingFloor.com