Originally posted at MarctoMarket.com
Greece has formally fallen into arrears with the IMF, and the second aid package has expired. The markets have taken it in stride. The euro was briefly pushed below $1.1100 but snapped back quickly amid reports that Greece is willing to accept most of the creditors’ conditions. The euro bounced almost three-quarters of a cent on the headlines, but it likely reflects more short-term market positioning than a serious new development.
As we have noted, the European creditors and the Greek government were fairly close to an agreement prior. For all the talk of Syriza being radical, it was willing to accept around 90% of the creditors’ demands. This is the basis of one of the criticisms of the referendum: the government wants Greek people to reject the creditors proposal even though it supports the lion's share of it.
This seeming reversal by Tsipras will likely annoy the official creditors as it underscores that there was no reason to end negotiations. It will not bolster the sorely lacking trust. Indeed, it shows that despite the polls suggesting that the "no" vote is ahead, the Syriza government is flailing. As of late yesterday, Merkel rejected new negotiations now until after the referendum. Due to the unpredictable nature of Syriza, we suggest that there is still a modest chance that the referendum is called off at the last minute.
The Greek drama is still the main focus though there has been the usual beginning of the month survey data. The highlights include a stronger than expected Japanese Tankan survey, especially for large companies, and capex plans were hiked to 9.3% from a -1.2% fall in the March survey. Small businesses are still struggling, but the case of an expansion in the BOJ's QE is not to be found here.
China's PMI possibly shows the transition from manufacturing to services. The official service PMI rose to 53.8 from 53.2. This is a four-month high. The official manufacturing PMI was unchanged at 50.2. The consensus expected 50.4. New orders and new export orders weakened further, suggesting no imminent recovery in the manufacturing sector. The HSBC manufacturing PMI was revised to 49.4 from 49.6 in the flash. After a rally yesterday, Chinese stocks turned back down today with the Shanghai shedding 5.25%; reversing early gains to settle on its lows.
The eurozone manufacturing PMI was in line with the flash 52.5 reading. Germany was unchanged from the flash 52.5, and France improved to 50.7 from 50.5 flash. Note that this is the first reading above 50 for France since April 2014. Both Spain and Italy's manufacturing PMI were softer than expected and below the May readings. Spain's manufacturing PMI stood at 54.5 down from 55.8 in May. Italy's stood at 54.1 from 54.8. The three factors that helped fuel the cyclical recovery, decline in oil prices, the euro and interest rates have all been partly reversed.
The non-EMU European manufacturing PMIs were disappointing. UK's fell to 51.4 from 51.9. This is a two-year low. The average in Q1 was 53.7. The average in Q2 is 51.7. The manufacturing sector is small, and the service sector update is important, but the market may have been jumping the gun with talk of a November hike.
Separately, Norway and Sweden also reported disappointing PMIs. Norway's slumped to 44.0 from 46.5. This is a six-year low. Although the central bank may not put as much emphasis on this report as it does its own regional survey, another rate cut is likely. Sweden's Riksbank meets tomorrow and will not like the fall in the manufacturing PMI to 52.8 from 54.8. It is the low for the year and orders fell to eight-month lows. There is more talk of a small rate cut and a possible extension in the bond purchase program.
The US reports a slew of data today. The ADP employment estimate is for 218k private sector job growth. The ADP has underestimated the BLS figure in five of the past seven months. The market also puts emphasis on the ISM manufacturing report. Chicago’s disappointed yesterday, suggesting downside risk with today’s national report. The market expects a small gain to 53.2 from 52.8. Although the markets typically do not respond to it, we suggest the auto sales data is also important. After a heady 17.7 mln unit pace in May, a still strong 17.2 mln unit selling pace is expected in June. This speaks to the ongoing strength of US durable goods purchases.
Related podcast interview:
Steve Hanke: Greek Problems Going to Get Worse, Not Better
