U.S. futures are pointing to a slightly higher open on Thursday, while in Europe, we’re seeing further losses, as fears that Greece will default on its debt weigh on investor sentiment.
It was hoped that significant progress would have been made on key issues relating to pension reform and VAT over the last few week so that any deal could be signed off by finance ministers today, but with talks instead collapsing, a deal is extremely unlikely. This raises serious doubts that a deal will be able to be agreed in time for Greece to receive the funds by the end of the month, when it needs to repay €1.5 billion to the International Monetary Fund and pay €1.6 billion in pensions and public sector wages.
It has been suggested in recent days that Greece could be afforded a 30-day grace period after failing to make the repayment to the IMF before it is considered to have defaulted, but this has been denied by a source familiar with the debt talks. Even if this turned out to be true, a crisis in Greece will only be averted as long as the European Central Bank continues to offer emergency liquidity assistance (ELA) – which currently stands at €83.7 billion – to the country’s banks. If Greece misses a €3.5 billion payment to it on July 20th, there would be intense pressure to cut its banks off from the ELA, if it hasn’t already after a missed IMF payment.
As has been the case for a number of months now, there is a lot of uncertainty about how and when Greece would actually default, what would constitute a default and what would follow. Throughout this period, “deadlines” have come and gone and negotiations have continued without a crisis breaking out. The difference between the last few months and the last week is that investors are finally becoming very unsettled by the whole thing, and are pricing in a far greater possibility of a “Grexit.”
We’re unlikely to see strides being made at today’s eurogroup meeting, given that the events of the last few days have equated to steps back being made rather than forward, as both sides have once again taken to publicly attacking the other. Neither side is again interested in easing its demands on pensions and VAT, and without that, a deal cannot be done. Both are now resorting to public pressure in the absence of being able to convince the other in person.
Yesterday’s FOMC announcement and press conference brought about a very interesting response in the markets. The Federal Reserve is still clearly interested in hiking interest rates this year, but rather than focusing on this, it instead opted to emphasize its intention to raise them sooner, but slower, which struck a dovish tone with investors and brought about further weakness in the dollar. I don’t think this was unintentional from Chair Janet Yellen, given that a stronger dollar has been one of the headwinds for the U.S. economy this year. I’m not sure this will be enough to hold the dollar back when the Fed does hike rates but it’s interesting that people are becoming more concerned with the path of future hikes more so than the first one. I think this is healthy, as investors had become far too obsessed with the first hike.
Today’s CPI release, despite not being the Fed’s preferred inflation measure, will be of interest to investors, as it provides our first insight into U.S. inflation in May. We are expecting inflation to have picked up last month, which isn’t a surprise given the rise in wages and consumer spending. A 0.2% increase in inflation compared to a year ago from -0.2% is expected, while the core reading is expected to remain at 1.8%. This is not far from the Fed’s 2% target rate, which again supports a rate hike this year.