Weekly macroeconomic and market update

Are we seeing a potential shortcut to Grexit?

The Greece situation continued to deteriorate last week, with the usual political brinkmanship now tinged with frustration and exasperation from all sides involved. By all accounts, Greece has essentially run out of money and almost certainly cannot make the €1.5 billion payment to the IMF due at the end of the month without the release of bailout funds from creditors. Arguably this is still effectively a “soft” deadline – there are no automatic events triggered by a non-payment and the nature of the loans means ratings agencies won’t consider this an actual default.

Of greater concern is how much longer the ECB will provide emergency liquidity to the Greek banking system, which is starting to suffer very significant capital flight. Cash withdrawals accelerated last week with €5 billion being withdrawn from a total deposit pool of €134 billion at the end of April. This has sparked concerns that a bank run could follow, which in turn could force the hand of authorities into imposing capital controls – a potential unintended shortcut to Grexit.

“Gradual” is the US Fed’s new buzz word

The new buzz word from the US Federal Reserve is “gradual” and guidance on interest rates has followed this theme. Chairwoman Janet Yellen spoke about lingering concerns over cyclical weakness in the US labour market, even as other measures of economic growth have indicated continuing strength.

The ‘dot plots’ of forecasts by individual members still point to a September lift-off, but the trajectory now appears more gentle than before. There is also a greater likelihood of just a single rate hike this year (despite previous expectations for two hikes).

Last week’s other events

• German economic confidence fell more sharply than expected in June, with the ZEW Economic Sentiment Index slipping from 41.9 to 31.5 to reach its lowest level this year. The Current Conditions sub-index came in only slightly lower than expectations, but the economic outlook measure was considerably worse than expected – possibly resulting from uncertainty around Greece.
• UK employment figures were positive. Although the unemployment rate held steady at 5.5%, average earnings unexpectedly improved to 2.7% from 2.3%. UK retail sales came in slightly lower than expected for May, matching the previous month at 4.6% year on year.
• Across the pond, the US Philadelphia Fed Manufacturing Index surged to 15.2 from 6.7 (against an expected increase to 8.0). However, month-on-month industrial production slipped 0.2% from the previous month. New housing starts also slowed down, although new building permits were much stronger.

The markets

Last week saw mixed results for all the major asset classes. Notable updates for UK investors included the continued strengthening of the sterling against other major currencies, the FTSE finishing the week down 1.1%, and little change for 10-year Gilt yields.

• Equities – The FTSE 100 finished the week down 1.1% while the S&P 500 was marginally up by 0.76%. European equities (ex-UK) were just 0.48% softer and Japan was down 1.2%. Emerging markets also slipped during the week as Chinese equities gave up some of their recent gains.
• Bonds – UK Gilts were barely changed with 10-year yields at 2%. A degree of confidence found its way back into German Bunds and we saw tightening in the long end, with 10-year yields 10 bps tighter at 0.75%. The updated US Fed guidance also pushed yields down, with US 10-year Treasuries yielding 1.57% at close of play on Friday.
• Commodities – Oil had a volatile week with Brent crude briefly pushing the US$65 per barrel mark before finishing the week at US$62.71. Gold was stronger over the week, finishing at around US$1,200. Conversely copper continued its downwards trend and finished at US$2.59.
• Currencies – Sterling continued to strengthen against other major currencies, finishing up 2% against the US dollar and 0.76% against the euro (at US $1.59 and €1.40 respectively). The dollar’s weakness was driven by the output of the Federal Reserve’s midweek meeting, although on the whole there was little in the way of dramatic moves.

The week ahead

Eurozone leaders will hold a make-or-break meeting this evening to discuss the Greek debt crisis. Before that, we have Eurozone consumer confidence data as well as US home sales. Tuesday sees the release of numerous PMI readings, starting with flash Chinese Manufacturing PMIs. These are followed by Eurozone flash PMIs for Services and Manufacturing, and then US Manufacturing PMIs. Expectations on both sides of the Atlantic are for little change in the low 50s, indicating continued marginal economic expansion.

We have a quiet Wednesday with the IFO German Economic surveys as the most notable releases of the day, followed on Thursday morning by German consumer confidence numbers. In the afternoon we also get flash Services PMI updates, personal income and spending figures from the US. Friday morning will see Japanese readings for inflation, household spending and unemployment before we finish the week with French and Italian consumer confidence numbers.