Brinkmanship Yes, But Where Is The Brink?

Without top tier data in the US, and another Arctic chill, look for a subdued North American session, with much of the focus on the Eurogroup meeting to discuss Greece. It is due to formally start around 14:00 GMT (9 am ET), so headline risks likely grows toward the end of the European session and into the US afternoon. Of note, US Treasury officials acknowledge they have stepped up pressure on both sides to reach a compromise. Still, it appears easier said than done.

Greek banks are closed on Monday for a holiday. There is some concern that the Greek government is running out of funds, but our impression is that there are a number of things that it can do. Remember how the US government borrowed from the Social Security Trust Fund. The Greek government has domestic equivalents.

Acknowledging that a brinkmanship game is being played out, investors seem to think the brink is at the end of the month when the two-month extension to the aid program expires. However, this may not be the true brink. The key may not be when the program ends, but when Greece has to service its debt. The first payment to the IMF is on March 5 (~300 mln euros). That same day, Greece has about 1.4 bln euros in T-bill maturing that needs to be rolled over. This could prove difficult as foreign investors are not keen and Greek banks interest is curtailed by falling deposits and limits on use of ELA funds to finance the government.

The point is that Feb. 28th might not be the hard and fast deadline of all deadlines that it is made out to be. The brink may be a few days into the new month. Note that March 5th is also the date of the next ECB meeting. It will be held in Cyprus.

Meanwhile, the flash eurozone PMI showed further improvement. The composite rose to 53.5 from 52.6. This is the highest since last July. However, the details were more mixed. Manufacturing edged up to 51.1 from 51.0. The consensus was for a rise to 51.5. The service sector saw greater improvement, rising to 53.5 from 52.6. The consensus was for 53.0.

German manufacturing was disappointing, but the French reading was miserable. The German flash slipped to 50.9 from 51.0. The market had expected improvement. France slumped to 47.7 from 49.5. The service sector held up better. It rose to 55.5 from 52.6 in Germany and from 53.4 from 49.5 in France.

Japan reported its flash manufacturing PMI. It disappointed, slipping to 51.5 from 52.2. Next week Japan reports industrial output figures. Output is expected to have jumped 3% in January, helped by rising exports. Earlier this week, the BOJ upgraded its assessment for both industrial output and exports.

The UK retail sales were somewhat weaker than expected, with the headline falling 0.3% and -0.7% when autos are excluded. The December series were revised lower. That said, the year-over-year rate increased to 5.4% from 4.0% at the headline level and 4.8% from 3.8% excluding autos. The BOE's McCafferty who had been among the two hawkish dissenters seemed to sing from a songbook today. He cautioned that a rate hike now would risk un-anchoring inflation expectations. He did express concern about the strength of sterling as well. Note that sterling is trading at new seven year highs today against the EUR and that the UK's current account deficit was around 6% of GDP in Q4 14.

The dollar-bloc currencies are firmer today and the only major currencies that have gained against the US dollar this week. The yen is straddling the unchanged level. The pendulum of market sentiment has shifted away from a March cut by the RBA, while the RBNZ seems content to stand pat and not feed the speculation of a rate cut. The consensus continues to look for a Bank of Canada rate cut next month (March 4) and a soft retail sales report today (December expected to fall 0.4% and fall 0.8% excluding autos) will likely strengthen such ideas. The Canadian dollar has been fairly resilient this week to the decline in oil prices, which are broadly stable today, ahead of the latest rig count report.