Dollar Firmer In Quiet Turnover

With several central bank meetings this week, including the Federal Reserve, and Q1 GDP figures from the UK, US and Spain, and month-end position adjustments ahead of the May 1 holiday, it promises to be an eventful week. However, it gets off to a slow start. The US dollar is firmer, but largely confined to its pre-weekend ranges. The US dollar has been confined to around a half a big figure against all the major currencies.

There have been three developments to note today. First, Fitch downgraded Japan's credit rating to A from A+, citing the lack of stronger fiscal reforms in the FY2015 budget. There was no replacement of the sales tax increase that had been postponed. The outlook is stable. The yen popped, poking through the JPY119.40, but quickly came off. Foreign investors hold relatively small amounts of Japanese government debt, and investment grade status was retained.

Second, Chinese shares continued to rally, but the yuan itself sunk to one-month lows. There are two main stories swirling for attention. The Shanghai Composite rose 3%, its biggest rise in three months, amid speculation that the government may merge a number of state-owned enterprises (SOE). The idea is that currently there are 112 centrally administered SOEs. These may be consolidated into 40 enterprises. The other story is that the PBOC is discussing unconventional measures, including direct purchases of local government bonds from the market or buying bonds from commercial banks.

Third, more people are beginning to recognize what we pointed out here last week, that Greek contagion may be increasing. Greek bonds are under modest pressure with the 10-Year yield rising 4 bp. Spanish, Italian and Portuguese yields are also 2-3 bp firmer today. Core bond yields are lower. Last week's Eurogroup meeting was a big bust, as frustration with Greece on procedural and substantive grounds was expressed privately and taken to the media. Ironically the very same ministers have been critical of Varoufakis for his "leaks" to the press.

The Greek government has to pay government pensions and salaries this week. It has a roughly 200 mln euro payment due to the IMF on May 1, which—owing to the labor holiday—allows them to make the payment next week instead, on May 6. The ECB has been reviewing ELA on a weekly basis. Greek bank deposits continue to fall, and estimates suggest as much as 1.3 bln euros have been withdrawn.

Those who have been critical of the ECB's monetary policy are pushing for greater restrictions on ELA lending, even though the risk is shouldered by Greece's national central bank. On May 6, the ECB will debate whether to raise the haircut on collateral being used, mostly government securities, given the erosion in price and risk of restructuring. Any move that reduces the value of the Greek banks' collateral brings forward the day that they run out of funding. Solvency rather than liquidity becomes the greater concern.

The US earnings season continues this week and Apple (NASDAQ:AAPL) is the main attraction today. According to FactSet, 201 of the S&P 500 have reported. It estimates that 73% reported earnings per share above the mean estimate, which is in line with the five-year average. However, only 47% have beaten sales estimates, and this is well below the five-year average. Companies buying their own shares back has helped boost the earnings-per-share calculation by lowering the denominator.

In terms of economic data, the Markit service and composite preliminary PMIs will be reported as will the Dallas Fed April manufacturing survey. The main economic data of the week is the first estimate of Q1 GDP. The Bloomberg consensus is still for 1% annualized growth, but we suspect that may still be a bit on the high side. The FOMC’s two-day meeting concludes on Wednesday. The statement is expected to recognize the slowing of the economy, which the Fed has already done, but continue to suggest the headwinds are temporary.