- Greece will seek an extension on the implementation of its latest austerity programme
- US stocks ended lower, giving up early gains following strong retail sales
- 10-year Treasury yields have reached the highest level since May as hopes for Fed easing in September have decreased
- Today, BoE minutes and the busy US data calendar will take centre stage
Greece will seek a two-year extension on the implementation of its latest austerity programme to improve growth chances, according to FT. The debt-ridden nation struggles to find EUR 11.5bn of spending cuts to be implemented in 2013 and 2014 under the current EU/IMF bailout deal. Instead of reducing the budget deficit annually by 2.5 percentage points of GDP, the new plan from Greece calls for an annual 1.5 point reduction over the next four years. This would also imply the need for additional funding the next two years equivalent to EUR 20bn, which Athens proposes be raised through an existing IMF loan, issuance of treasury bills and postponement of loan repayments.
US stocks ended the day marginally lower, giving up early gains following better-than-feared GDP data from Germany and France, as well as healthy gains in US retail sales in July. In fact, retail sales rose a whopping 0.8% m/m with broad-based gains in sales across categories, which should, however, be seen in light of the very moderate demand in previous months. However, the direction on US bourses may also have been affected by the thin trading volume, as the daily volume reached the lowest level since at least 2008 according to Bloomberg.
Yields on benchmark 10-year US Treasurys reached the highest level since May following the rebound in retail sales, which in turn may have dimmed hopes for Fed easing in September somewhat.
In the FX market EUR/USD has continued to hover just above 1.2300, as market participants await today’s key US data releases, which could be important in gauging the prospects for further Fed easing. USD/JPY has been trading near a one-month high following the strong retail sales data and expectations of Bank of Japan easing.
Global Scenarios, our quarterly outlook for the global economy, will be published this morning. While the outlook has become more downbeat, with disappointments coming from all regions, we expect some stabilisation in the coming quarters before a slight recovery sets in towards year-end. We expect below-trend growth in the US of 2.2% in 2012, which should prompt further Fed stimulus. The euro area recession has deepened and GDP is likely to contract by 0.4% this year, followed by weak growth in 2013. In China, we expect stimulus measures to lift growth towards the end of the year.
Global Daily
Focus today: The Bank of England minutes from the August meeting are likely to show an unanimous vote to keep the bank rate and asset purchases unchanged. More interesting will be hints of a 25bp rate cut at the October or November meeting. A rate cut was suggested in the previous minutes conditional on the effectiveness of the asset purchases and the FLS combined to bolster the economy.
Turning to the US, the calendar is busy. US CPI for July is likely to show an 0.2% increase in both headline and core inflation implying an unchanged annual core inflation rate at 2.2%. Core inflation has been stubbornly high over the past year but we expect the decline in wage inflation to filter through to core prices over the coming quarters.
Later in the day we expect the Empire manufacturing index, which is the first regional PMI released for August, to show a modest decline. Finally, the NAHB housing market index has been on an upward trend over the past three months along the improvement in the housing market and the August number is expected to show some stabilization.
Fixed income markets: Data showed yesterday that US retail sales rebounded strongly. This caused some weakness in the US bond markets, which spilled over to the European markets. Hence the yield curves saw a bearish steepening. In the US, the money market curve steepened too and the first hike of the Fed Funds rate is now priced in for March 2015.
While the data are welcome news following a number of weak months, the outlook is still rather mixed and we do not think this marks the beginning of a more bearish trend for US Treasurys. Rather we think international bond markets will be relatively range bound in the coming months. Short term, the markets could however push up yields a bit further, especially if US data continue to improve.
FX markets: The FX market will keep a close eye on the BoE Minutes to see how close the committee is to easing monetary policy once again. We expect that the vote to keep rates and asset purchase programme unchanged was unanimous. The market is also looking forward to the busy US calendar with industrial production as the main event.
Today's US data will be scrutinized to see if the probability of further easing from the Fed has gone up or down. We might be in a situation where strong data actually weigh on cyclical currencies as it dampens the outlook for further easing. We do in fact expect the Fed to engage in further easing and see further upside for EUR/USD the next couple of months.
In general we look for short- to medium-term support to EUR/USD, EUR/GBP, commodity currencies and Scandies. Hence, the big losers the next couple of months are expected to be GBP and USD. The picture is expected to reverse somewhat on a 12M horizon.
Scandi Daily
Norway: Today's Norwegian trade balance figures are not expected to attract much attention. Instead we will keep an eye on the weekly currency flow data from Norges Bank. As always we follow the positioning of "foreign banks" that we see as a proxy for speculative money. Despite the strong performance of NOK the past two months the build in long speculative positions has been modest. It might have changed last week but we will know much more about that at 10:00 CET.
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