We’re seeing some risk aversion in the markets ahead of the US open on Tuesday, with the larger than normal number of risk events this week weighing on sentiment.
Ongoing Greek talks remain one obvious risk event this week, especially as the country needs to pay 300 million euros to the IMF on Friday. There are some small signs of progress being made, although that is doing little to settle the markets, with most European equity indices in the red and bond yields in Europe on the rise.
We’ve had the usual optimistic comments from Greek government and central bank officials, which have been shrugged off by the markets. What makes me a little more hopeful is that senior creditor officials met last night to try and resolve the impasse in the negotiations, and are believed to be finalizing proposals that will be sent to the Greek government today. Little is known about the proposals at this stage, such as whether they include any form of concessions or if they are, in fact, an ultimatum ahead of the IMF deadline. It does just feel like this has entered a far more serious stage, and all involved are now determined to reach an agreement. Unfortunately, it’s difficult to be too optimistic, given the experiences of the past and the constant rumours of referendums and elections being called.
The other big risk event this week is Friday’s jobs report, which became even more important yesterday when data once again showed flat spending and lower than expected inflation in April. This again supports the need to delay a rate hike, although it does come from a month that Yellen has already referred to as falling within the transitory period, which would once again mean consumers have more to spend over the summer. Friday’s jobs data is for May, and therefore gives a more updated view on the economy.
There is little to focus on in the US today. Factory orders for April will be of interest, although they are expected to disappoint. We’ll also hear from FOMC member Lael Brainard, which could offer more insight into whether we will see a rate hike this year.
Eurozone inflation rose slightly more than expected in May to 0.3% – the first time we’ve seen actual price growth since October – while the core inflation also exceeded expectations rising to 0.9%. This suggests that not only higher energy prices contributed to the higher inflation reading, although I’m not getting too excited quite yet. There is an enormous amount of slack in the economy, so I expect prices to remain subdued. We may see some additional inflation over the summer months from increased tourism, but I would expect this to be reversed later in the year.
With this in mind, I expect the ECB to once again stand by its quantitative easing program tomorrow and remain committed to completing it in full. While there will likely be some voicing concerns about the rise, I believe most will view this as probably being temporary, with underlying price pressures remaining to the downside. Any deviation from that stance at this stage would seriously shake things up in the markets, given how early we are into the program.