Ceasefire with Russia, No Deal on Greece

A ceasefire in Ukraine appears to have been reached, and despite some confusion late yesterday, no compromise has been struck over the new Greek government's demand that it is recognized that the previous agreements are not working.  However, that may give a false sense of what is the more intractable problem.  

Greece and European officials think they are both in a strengthened negotiating position.  Greece's primary budget surplus, the electoral victory, and the principle that monetary union is irreversible emboldens the new government.  European officials recognize that the monetary union is better prepared to deal with a Greek exit.  There are backup facilities that did not exist in 2010, and the financial system is widely perceived as stronger.  This has encouraged both sides to adopt brinkmanship tactics.  That means that negotiations have to be extended to the last minute of nearly so.  

Some observers insist on framing the issue in terms of blinking or compromising.  Greece has already backed down from its initial demands.  Europe has yet to more at all.  A compromise means both sides have to move.  Otherwise it is not a compromise, but a capitulation.  The classic example is the Cuban Missile Crisis.  Russian ships did turn back, and the missiles in Cuba were dismantled.  That is where the story many Americans tell ends.  However, quietly JFK removed missiles from Turkey. 

In any event, the ceasefire in Ukraine is a necessary, but insufficient step to avoid further escalation.  It is not a comprehensive agreement.  Greece and European logjam is ultimately over tactics and the tug-of-war between creditors and debtors.  Russia is a revisionist power in the sense that it wants to change the world order.  It continues to occupy parts of Georgia and supports a breakaway region in Moldova.  The underlying principle is strategic.  

Outside of Greece and Ukraine, there are five other drivers today.  First, weaker than expected Australian employment data has increased speculation of a rate cut next month.  Speculation has also increased for an additional cut in Q2.  The unemployment rate rose to 6.4% from 6.2%, even though the participation rate was unchanged.  Australia lost 28.1k full time positions after gaining 46.4k in December.  Part time positions increased by almost 16.  The Australian employment data is particularly volatile, and although the market may be exaggerating its importance, we agree with the general direction.  We expect additional rate cuts.  

Second, strong machine orders in Japan, coupled with some official comments have weighed on the dollar against the yen, despite the almost 2% rally in the Nikkei and US 10-year yields pushing through 2%.  Machine orders jumped 8.3% in December.  The consensus expected a 2.3% increase.  A report claiming insight into the inner workings of the BOJ said that there is a consensus at the central bank that views further monetary easing would be counter-productive and concerned that a weaker yen would undermine confidence.  This "leak" comes on the heels of the G20 meeting that officials renewed their commitment not to target exchange rates.  The dollar dropped quickly on the "news" to JPY118.75 but quickly rebounded as few really thought a new round of easing was imminent.  Note that early Monday Japan will report Q4 GDP.  It is expected to rise by nearly 1% on the quarter after contracting 0.5% in Q3.  

Third, Sweden's Riksbank cut its repo rate to -10 bp and indicated it would buy SEK10 bln of Swedish bonds (1-5 year duration).   It may follow up with a new lending program to corporations via the banks.  It is also prepared to increase its stimulus, and warned of the risk of inter-meeting moves.  This is somewhat more aggressive than the market expected, and the krona is the worst performing currency; 1.1% lower against the dollar and euro midday in London.    The euro had spiked to almost SEK9.69 before pulling back to SEK9.60.  

Fourth, the BOE’s quarterly inflation was seen as somewhat more hawkish than expected.  Sterling rallied a full cent to $1.5330 to approach the pre-US employment high at the end of last week near $1.5350.  The key take away is that the BOE sees the disinflationary situation to be temporary and will begin to increase again by the end of this year.  The BOE also lifted its growth forecasts for the next two years.  Its forecasts, it says, are based on market expectations of the first rate hike taking place in Q3 2016.  

Fifth, the US weekly jobless report will be overshadowed by the January retail sales report.  Last week’s national jobs report and the JOLTS this week address this.  Headline retail sales will be depressed by the drop in gasoline prices, and we already know auto sales fell from December.  However, like the key to the employment data was earnings, the important element to retail sales report is the measure used for GDP purposes (excludes gasoline, autos and building materials).  It unexpectedly fell 0.4% in December.  Even a consensus gain of 0.4% in January may be enough to give the dollar a bid.