Consolidative Tone as Dollar Awaits Fresh News

The US dollar is firmer but is largely within the ranges seen yesterday.  The market awaits developments from the G20 meeting that concludes today and meeting of European finance ministers followed by the heads of state gathering.  

The draft of the G20 communique seems to lean against the currency war motif that is played up in the media and among some analysts.  The fact of the matter is that the supposed belligerents do not see it that way and are encouraging countries with weak economies to continue to accommodative monetary policy.   The underlying idea is that simply pursuing currency devaluation as goal is a zero-sum exercise.  The beggar-thy-neighbor takes others' demand.  Easier monetary policy is a non-zero-sum insofar as it spurs demand.  

There does appear to be some movement in the Greek position that may still form the basis of a compromise.  This is seeing a bit of a recovery in Greek bonds and stocks today.  The 10-year bond yield is off 35 bp to a still-high 10.4%.  The 3-year yield is off 110 bp to just below 20%.  The Athens stock exchange is up about 2.3%, led by a 4.5% bounce in financials.

The broad outlines of Greece's new proposals include accepting around 70% of the existing arrangement and possibly tapping part of the 7 bln euro tranche that Athens has been refusing.  The new Greek government will propose new reforms and wants to draw on the expertise of the OECD.  According to some reports, Greece is also proposing the transition period (bridge loan) extend through August rather than May.    Greece also wants European creditors to forgo nearly 2 bln euros in profits earned on Greek debt and re-purpose 11 bln euros for bank recapitalization to help address the non-performing loans.  It also is pushing for a smaller primary budget surplus. 

That said, the official creditors do not appear to have softened their position one iota.   This seems to be the third iteration of the new proposals from the new Greek government.  It is almost negotiating with itself.  Still the basis for an agreement exists.  It most certainly will not be a meeting in the middle.  Rather something like 80-85% of the existing framework will likely be retained and some modest concessions, like the smaller primary budget surplus and easier terms on existing debt in exchange for new reforms.   Syriza is more likely to implement the reforms to curb tax evasion and rent-seeking behavior than previous governments.  

Turning to the macro-economic news, China reported soft inflation figures.  This spurred speculation of a policy response and helped lift local stocks and may have given the Australian dollar a brief lift.  Headline January CPI rose 0.8% year-over-year, half of the 1.5% pace seen in December.  Food prices fell sharply and are now up 1.1% year-over-year.  They were up 2.9% in December.  Non-food prices are edging closer to deflation with a 0.6% increase, down from 0.8%.   

Norway and Switzerland also reported CPI figures.  In Norway, inflation was actually a touch stronger than expected, and this may be helping to underpin the krone, which up 0.25% against the dollar is the strongest of the majors.  Headline CPI slipped 0.1% on the month (consensus       -0.3%) while the year-over-year rate eased to 2.0% from 2.1%.  The underlying rate was unchanged at 2.4% year-over-year. 

Swiss CPI fell 0.4% in January for a -0.5% year-over-year pace, after a -0.3% in December.  On an EU harmonized methodology, Swiss CPI is -0.1% year-over-year.  Note that yesterday's sight deposit data suggest that the SNB did not intervene last week.  It apparently did not need to as the leaked (planted?) story about the informal range (whatever that means) between CHF1.05-CHF1.10 got the market to do the work for it. 

Three European countries reported January industrial production data.  The two eurozone members, France and Italy, both reported better than expected data while the UK was slightly disappointing.  France’s numbers were, in particular, impressive with a 1.5% rise in December, five times more than the consensus expectation.  It was led by a 1.2% rise in manufacturing output, three times more than the consensus.  The consensus expected a flat Italian reading.  Instead, industrial production rose 0.4%. 

This is consistent with what we detected as signs that the euro zone economy was improving at the end of last year.  The eurozone reports its estimate of Q4 GDP at the end of the week and there is upside rise to the consensus 0.2% forecast. 

The UK data was somewhat disappointing.  Industrial output fell 0.2%, a little more than expected.  It appears that the oil sector was a significant culprit.  Oil and gas extraction was off 3.1% on the month.  The government played down the impact of falling oil price and tended to emphasize extended maintenance in one of the large North Sea fields.  Manufacturing output rose 0.1%.  The consensus expected a 0.1% decline.  The 2.4% increase year-over-year is the best showing in four years. 

The North American session features the JOLTS report and the Fed’s Lacker on the economic outlook.  As the G20 meeting concludes, there will be a number of press conferences that pose some mild headline risks.