Beware Of Greeks Bearing Collateral

The main story today is not that the ECB will no longer (as of February 11) accept Greek government bonds as collateral and that Greek banks can have access to the national central bank via the Emergency Lending Assistance. That news broke late yesterday in North America. The euro fell around a cent on the news. The real development today is that the impact remains largely confined to Greece. As this became clear, and that the ECB would lift the ELA borrowing cap by 10 bln euros, the single currency recovered in the European morning. It is above levels that were prevailing when the news initially broke.

Following the election results, Syriza came out swinging. It first pressed for debt forgiveness and then offered a sketch of a bond swap scheme. The IMF, EU and Germany did not like it. The ECB was the bludgeon. This was not a technocrat decision. It was a discretionary political decision. It could have waited until closer to the end of the month and let elected officials work it out. Like Hisenberg's uncertainty principle, the mere fact of officially observing that it was not confident of reaching a new agreement made that outcome more likely.

Greek markets have been hit. Yields are sharply higher (the 10-Year yield is up around 60 bp to 10.30% and the 3-Year note yield is up 170 bp to 18.03%). Greek stocks are off about 5.5%, led by financials, which are down around twice as much. European peripheral bond yields are 1-3 bp higher, and most markets in Europe are lower.

It is interesting to note that Spain is performing a little worse than Italy. The ECB's shot across the bow was not meant only for Greece, but as well, it is a signal to others who are thinking about breaking from the austerity regime. Don't let the dispute between the ECB and Berlin over monetary policy confuse the issue. The ECB wants the national governments to do their part—structural reforms—and it is willing to do its part to boost inflation in line with its mandate, but it does not want to call into question the austerity regime. In fact, Draghi has said that ordo-liberalism is part of the ECB's DNA. Before the dispute over monetary policy, Draghi was affectionately called the Italian Prussian in a German magazine.

The news stream is light. There are three new data points. First, Australia's retail sales rose 0.2%, half of what was expected. However, China's required reserve cut after local markets closed yesterday, talk that the PRC demand for iron ore remains strong, and reports of Japanese interest has seen the Australian dollar trade higher, recovering from yesterday's late decline.

Second, Sweden reported stronger than expected industrial output. The 1.7% increase in December compares with a consensus forecast of 1.0%. However, this was negated by the whopping 11.4% decline in industrial orders year-over-year decline in industrial orders. We would not want to read too much into the decline in orders though it weighed on the krona. It was largely a base effect. The 5.1% increase on the month is almost more than the cumulative increase in the previous eleven months. Last December industrial orders rose 13.6%.

Third, consistent with the meme we have observed, that while the political matters are heating up (sorry never liked “hotting”) and deflationary forces strengthen, the eurozone economy is enjoying better economic data. Germany reported strong factory orders. The 4.2% rise in December factory orders was more than twice the consensus expectations, and the year-over-year rate stands at 3.4%, rather than 0.7%. Over the last couple of weeks, M3 and bank lending have improved, PMIs are firmer (except France). Retail sales have firmed. This is not to suggest a surge in growth is at hand. Rather, we do expect the decline in the euro, oil and yields to offset some of the other headwinds the region faces.

The US reports data derived from Q4 GDP figures. The implication of a somewhat disappointing growth number is downside risk to productivity and an upside rise to unit labor costs. After last week’s sharp fall in weekly initial jobless claims, this week’s report will draw interest. However, the labor market focus is on tomorrow’s national report. The US December trade balance has the potential to impact Q4 GDP revision expectations. The market may also be sensitive to disappointing exports, as one of the much talked about issues the knock-on effects of a strong dollar.