Comfort in the familiar
We are still in the grip of some very familiar trends as we come to the end of a rather volatile month. World markets are still looking for a few things before the general feeling of unease can dissipate. The primary focus and longer term concern is the creation of inflation within developed economies and the ability of central banks to normalise monetary policy as a result.
Q1 growth and inflation numbers have been near universally bad from developed economies – the Eurozone recovery not withstanding – but optimism around the abilities of the US and UK economies in particular to rebound has remained. In the past ten days, both have shown improved wage measures for workers, and near-term low or outright negative inflation should bring growth higher. Friday’s improvement in core inflation – prices discounting away food and energy movements – moved higher in April in the US, and in concert with the wage gains, stabilised a wobbly USD.
The USD is higher across the board this morning, including a fresh four week low in EUR/USD and eight year high against the yen. The second focus of markets is the driver of the weakness in the European single currency.
Impasse in Greece
Greek officials must head back to the negotiating table again today with a deal nowhere close, it seems. Finance Minister Varoufakis told reporters over the long weekend that it was the insistence of Greece’s creditors for more austerity that was the major impasse. To quote the Greek Finance Minister directly, “Our government cannot – and will not – accept a cure that has proven itself over five long years to be worse than the disease.” That seems to be the ball game for now, but with EUR1.6bn of repayments to be made through June alone. The first hurdle is a 308 million euro payment on June 5, next Friday, before another 347 million euros are due June 12, followed by a payment of 578 million on June 16, and 347 million euros on June 19th.
Our thoughts on the Greek situation through the summer are available here.
Euro getting hit hard
Such is the scale of euro selling that GBP/EUR is back into the 1.41s this morning with very little sterling positivity to influence it; it is all euro weakness. Spanish local elections that saw heavy losses for the ruling Partido Popular are also being blamed.
The week ahead
Away from these rather existential issues there are a fair few data points to be wary of. Revisions to Q1 GDP announcements from the UK and the US are likely to go in opposite directions. We can expect a revision higher to the numbers from the UK as services and construction growth rebounded in the latter part of the quarter. We look for 0.4% QoQ. For the US however, we see a trip into negative territory with estimates centred around a 1% decline in output on an annualised basis. Both announcements are due on Thursday.
Central bank news comes from the Bank of Canada. Recently the meetings of the BOC have been seen as a bellwether for other central banks that have been largely affected by the declines in energy and other commodity markets such as Australia, New Zealand and South Africa. I am looking for a hold in Canada on Wednesday and for the Canadian dollar to remain weak in the face of poor oil performance.
