Below trend growth to continue
The market is focussed on the next steps after the breakdown in talks between Greece and its European creditors overnight and Thursday’s Federal Open Market Committee releasing its latest forecasts and views on Thursday morning our time.
It’s a relatively quiet week as far as local events are concerned. Instead the market is focussed on the next steps after the breakdown in talks between Greece and its European creditors overnight and Thursday’s Federal Open Market Committee releasing its latest forecasts and views on Thursday morning our time.
As my FX Strategy colleague Ray Attrill has already noted in this morning’s Market Today, it seems Greece has reached its Last Chance Saloon with news overnight from Brussels that the latest talks aimed at bridging the differences between Greece and her creditors have collapsed. Further pension reforms and widening the VAT are key sticking points, while Greece’s plea for a commitment to debt relief continues to be rebuffed.
In a summary posted on the IMF’s web site overnight, Olivier Blanchard, Economic Counsellor to the IMF has summarised in a retrospective note what needed to be done to get a deal across the line. (You can read Blanchard’s post here.) Looking back at the 2012 bailout, Blanchard says the central point of the 2012 program was about Greece achieving enough of a primary budget balance (non-interest) to limit its indebtedness and agreeing to associated reforms. European creditors were to provide the needed financing and provide debt relief if debt exceeded 120% by the end of the decade.
As part of that 2012 program, by 2015, Greece was to have achieved a 3% of GDP primary surplus, increasing to 4.5% of GDP in 2016. (Such a forecast was still included in the IMF’s Fiscal Monitor released in April this year.) This target will now not be met; indeed, it’s now readily apparent from news over recent months that Greece’s finances remain in a perilous state with its budget most likely in primary deficit. In other words, even if it had no debt and thus no interest payment, its budget remains in the red and needs external finance to sustain government spending at current levels.
Greece’s creditors are demanding pension reform amounting to a cut of 1% of GDP together with a widening of the VAT. (Greece’s pensions amount to some 16% of GDP; by contrast, Australia’s age, disability and family income support amounts to 5.4% of GDP.) The IMF’s Blanchard has noted in his post overnight that the pension reform could be achieved while still protecting the poorest pensioners and that they were always open to alternative pension reform design. It’s also understood that such pension reform is a no go area for PM Tsipras and so it is not a surprise that Greece’s negotiators have strongly rebuffed the proposed policy reforms and negotiations broken down.
With its budget still in primary deficit, the Greek Government’s finances remain fragile. The ball is now in Greece’s court. It is increasingly apparent that Greece really has reached the Last Chance Saloon for political level agreement that avoids an otherwise inevitable default to the IMF on 30 June, and the ECB later in July. A reported meeting of Eurozone finance ministers this Thursday (18 June) is being cited as the next opportunity for an agreement to be reached according to Greek sources.
Today, watch for a possible announcement that the ECB is raising the ‘haircut’ on Greek collateral currently accepted by the ECB in return for its funding of Greek banks under the Emergency Liquidity assistance (ELA) programme.
Markets in early trade today initially sold the Euro lower, with the Euro lower on the crosses, including against the AUD, the AUD/USD initially getting some support. That initial support for the AUD/USD has since been unwound. Any escalation in market volatility would also be a negative for the AUD/USD.
On Thursday morning (4am AEST), the Fed will release its new set of growth, inflation and unemployment forecasts and its “dot point” FOMC member forecasts for the Fed funds rate. No one expects any change in the Fed funds rate, though markets remain priced toward Fed rate lift-off later this year. NAB’s core view remains for Fed Funds rate lift-off will be announced at the 18 September FOMC, with clearer evidence of returning US economic growth and thus confidence in the Fed reaching its 2% PCE inflation target.
The FX and bond market will be paying close attention to the Fed Policy Statement, to what Fed Chair Yellen has to say in her press conference, and new US economy forecasts, with particular forecasts on those dot point estimates of the Fed funds rate for the end of 2015, 2016 and 2017.
The previous median of the dot points at the March 18 FOMC (its most recent set of forecasts) had a median Fed funds forecast of 50-75 bps for the end of 2015 and 1.75-2% for the end of 2016. The US market at the end of last week was 53% priced for a September 18 lift-off. If the Fed hangs tough and hold to its median Fed Funds forecast for end 2015, that would be supportive of short-term US yields and we expect the USD.
As far as local events are concerned, the week kicks off later this afternoon with a speech from Chris Kent, RBA Assistant Governor (Economic) at 5.30pm. At the time of writing, there was no speech title. Given he is chief economic adviser and that he’s speaking at the Australian National University in Canberra, there’ll most likely be a good measure of economy focus even though it comes at the heels of Governor Stevens’ speech this week that set out the broad policy parameters, including the limits to what monetary policy can do to promote sustainable economic growth.
There is also a speech tomorrow morning (7.55am) and panel participation by Guy Debelle, Assistant Governor (Financial Markets), at the Launch of Financial Integration in the Asia Pacific: Future of Australian Financial Services, Sydney. Debelle is extremely market savvy and the market always pays close attention to his comments, especially in this environment of Greek uncertainties and in the lead up Thursday’s FOMC.
The RBA Minutes of this month’s Board meeting are also being released tomorrow. While the market always pays attention to the main headlines of the Minutes, Stevens’ speech last week has already provided a good dollop of policy guidance. The market may well be paying closer attention to what Kent and Debelle have to say for any clues on the finer detail on the economy, including any impressions or reaction to the latest set of data this week on confidence and the stronger labour market report which now sees the unemployment rate below the RBA’s earlier May forecasts (Chart 2). Besides the above RBA speeches and Minutes, there is also the RBA Bulletin that includes the Bank’s latest in-depth research on the economy and wider financial policy issues.
Data-wise, there is the Tuesday’s weekly ANZ-Roy Morgan consumer confidence and motor vehicle sales (which may be interesting following the May budget’s $20,000 investment tax allowance-note this is yet to be legislated) and monthly RBA FX transactions detail, released Thursday.
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