Commentary on the economic , geopolitical and simply fascinating things going on. Served occasionally with a side of snark.
Wednesday, July 3, 2013
Portugal political troubles with austerity on a political deathbed , leading Europe lower this morning ( and Greece may have to wait three months for its next aid tranche ? ) . Will Draghi have to unveil his OMT bazooka - the one without a term sheet to date - and what does the ECB do when countries quit on austerity as Portugal seems likely to do ? Egypt has its Morsi deadline at 10am EST - what happens at that time if Morsi doesn't back off from the edicts of the Egyptian military - civil war ? What type of " roadmap does the military roll out anyway - what happens if Morsi says forget about it ? Sovereign credits in emerging markets tommy hammered , not surprisingly .... stocks also hit - where is the safe haven today ?
Submitted by Mark J. Grant, author of Out of the Box,
Before a midnight breaks in storm, Or herded sea in wrath, Ye know what wavering gusts inform The greater tempest's path;
Till the loosed wind Drive all from mind, Except Distress, which, so will prophets cry, O'ercame them, houseless, from the unhinting sky.
-Rudyard Kipling
I stand not upon laurels but what I have printed.
For two years I said, "Play the game but when it turns---Flee." The turning points were always two things. The first was a serious event that turned over the applecart. The second was the Fed reversing course.
When the Fed did reverse course I put out a warning moments later, "Take money off the table." I repeated that warning for three days. I repeat it again today if you have not done so already and if you have; take more off the table.
The consequences of the Fed's decision tosses hand grenades into the wind with tumultuous reverberations. Shrapnel is ensuing. More blood will be spilt.
Portugal
Two Ministers resign. The yield on their ten year is back above 8.00%. The government is in turmoil and may topple. Contagion will be retched upon the streets of Madrid, Rome and Paris. Crises has returned.
Cyprus
The President of Cyprus is meeting with Mr. Draghi today and requesting that the terms of their loans be lowered, extended perhaps pretended but anything at all so Cyprus has to pay less money. He is not asking for this, he tells us, he is just whispering it into the wind I suppose. Ah the Europeans; so good at whispering and denying that they spoke.
In the meantime Cyprus implemented a debt restructuring that is not a debt restructuring because it is now called a, "debt management operation." It looks like a pig and acts like a pig and smells like a pig but the Europeans insist that it is a boar.
"Here piggy, piggy, piggy," I say.
The Cypriots have a problem though. They have $2.6 billion in outstanding bonds that are governed by English Law. Don't you just hate it when that happens? If you read this and tell Mr. Draghi or Ms. Merkel please bring along the smelling salts.
Here is the language for Cyprus’s English Law bonds. This is the "moratorium" section of the events of default:
"A moratorium on the payment of principal of, or interest on, all or any part of the External Indebtedness of the Republic or any State Agency shall be declared or any such moratorium occurs de facto or the Republic or any State Agency is unable to pay its debts as they fall due or commences negotiations with any one or more of its creditors with a view to the general readjustment or rescheduling of all or any part of its External Indebtedness…"
Here is the definition of "external indebtedness" taken from the bond covenants:
“External Indebtedness” means any (i) indebtedness of the Republic in respect of moneys borrowed or raised by the Republic and (ii) guarantees or indemnities given by the Republic in respect of indebtedness in respect of moneys borrowed or raised by others."
I know that you are just, "shocked, shocked" but it gets even better.
If the English Law bonds are declared in default by the British courts and the bonds must be immediately paid in full then the ESM loan to Cyprus gets called into play. The following is from the ESM loan agreement:
"The ESM, may…declare the aggregate principal amount of any or all Financial Assistance made and outstanding under the Facilities to be immediately due and payable… if…
Relevant Indebtedness of the Beneficiary Member State or (if applicable) the Fund having an aggregate principal amount in excess of EUR 250,000,000 is the subject of a declaration of default as defined in any instrument governing or evidencing such indebtedness and as a result of such a declaration of default there is an acceleration of such indebtedness or a de facto moratorium on payments…
Relevant Indebtedness means all External Indebtedness and Public Internal Indebtedness."
Dominoes anyone?
Egypt
Egypt's coup is complete but perhaps the most interesting part was when the Egyptian army released the following statement:
We swear to God that we will sacrifice even our blood for Egypt and its people, to defend them against any terrorist, radical or fool…"
I wish someone in the United States would say that. I would vote for them as President. Of course if the "fool" part was truly operative we would have to replace all of the members of Congress too.
Ah! What avails the classic bent And what the cultured word, Against the undoctored incident That actually occurred?
-Rudyard Kipling
regarding those Cyprus bonds.....
Cyprus to discuss bonds with troika
In the next few days Cyprus Finance Minister Haris Georgiades will hold talks with the island’s international creditors – comprising the European Central Bank, the European Commission and the International Monetary Fund – on the issue of state bonds which are set to mature at the end of July and whose amount comes to 2.6 billion euros.
Discussions will center on the technical matters of bond management, with Georgiades preparing to discuss with the troika of lenders ways of overcoming the problem created by the 1.8 billion euros issued as state support to Cyprus Popular Bank last year, as well as the subject of bonds worth 800 million euros held by banks, cooperative lenders and semi-state corporations.
Finance Ministry officials said that Nicosia will seek ways to renew the bond of 1.8 billion.
The cash-strapped government’s total debt amounts to 5.1 billion euros.
A couple of months ago we asked, ‘Who’s next in line in the eurozone crisis?’. Our top pick was Portugal for a number of political and economic reasons, it now seems that prediction is coming to pass.
Summary: The Portuguese government is on the rocks. The junior coalition partner the People’s Party (CDS-PP) will hold a meeting this afternoon to determine whether to support the government, if it withdraws support in parliament, elections seem inevitable, although they could be delayed for some months. Such a move would seriously hamper Portugal’s economic reform programme, which is already off track. Portugal has only met its deficit targets due to one-off measures while competitiveness adjustments have slowed and contingent liabilities remain a hidden risk. With the country on the cusp of an unsustainable debt burden any delays would likely be the final straw which pushes Portugal into needing some form of further assistance.
Portuguese coalition government fighting to survive
The coalition government in Portugal may well break up. Its position has been eroded by a series of unexpected resignations:
Finance Minister Vitor Gaspar – He resigned on Monday citing the protests against austerity and the decisions by the Portuguese Constitutional Court to overturn some of the government’s reforms. Said he felt his credibility was undermined by Portugal missing numerous reform targets.[1]
Foreign Minister Paulo Portas (also Head of the junior coalition partner the CDS-PP) – resigned yesterday following the resignation of Gaspar. His resignation has been rejected by Portuguese Prime Minister Pedro Passos Coelho, who is fighting to keep the coalition together. The two remaining CDS-PP ministers have suggested they will also resign in the near future, which would bring an end to the coalition.[2]
The coalition government (Social Democrat and the People's Party) currently controls 132 seats out of 230 in the Portuguese Parliament. Without the CDS-PP this would drop by 24 to 108, meaning Passos Coelho’s Social Democratic Party would no longer command a majority.
What happens next?
The leadership of the CDS-PP meets this afternoon to decide the next moves. The Portuguese media expects all ministers and undersecretaries from the party to resign immediately after the meeting.[3] Meanwhile, Portuguese President Aníbal Cavaco Silva is due to hold talks with Passos Coelho and all the political parties holding seats in parliament tomorrow.
The key aspect is not whether CDS-PP ministers pull out of government, but whether the party withdraws its support in parliament.
CDS-PP pulls out of government, but maintains its support in parliament.Passos Coelho’s government can stay in office with the same majority, after a cabinet reshuffle. However, this would be a tenuous arrangement given the significant austerity which still needs to be implemented. It is of course possible that Portas’s move was a tactical one, looking to secure more influence as his electoral support falls ahead of this weekend’s party conference.[4]
CDS-PP withdraws its support in parliament. The government would lose its majority. Passos Coelho could then decide to either go ahead with a minority government or step down. It is not entirely unusual for Portugal to have minority governments. The government led by former Socialist Prime Minister José Socrates after the 2009 elections was a minority government, for instance – but was forced to an early resignation after parliament rejected an austerity package in March 2011. Another Socialist Prime Minister, António Guterres, uniquely managed to lead a minority government through an entire four-year parliamentary term between 1995 and 1999. That said, the situation is much tougher now given the crisis, and keeping a stable minority government will be a very difficult proposition.
What does it take for the government to fall?
Prime Minister Passos Coelho chooses to resign. He said yesterday he does not want to, but could be forced to quit at some point if he loses his majority in parliament.
A no-confidence motion is adopted by the parliament. The key would again be how CDS-PP votes. If the party abstained, Passos Coelho’s party would have enough votes to win. Interestingly, opposition parties in Portugal can only submit one no-confidence motion per parliamentary year. The new parliamentary year starts on 15 September. The Socialist Party, the Communist Party and the Left Bloc have already submitted a joint motion earlier this year, but the Greens have not. This government has already survived four no-confidence votes since it took office in 2011, five may be a step too far.
Passos Coelho requests a vote of confidence and loses it. The Prime Minister could decide to test his majority. However, he would have no chance of winning the vote if CDS-PP votes against him.
What happens after the government falls?
The Portuguese President Aníbal Cavaco Silva holds talks with the political parties holding seats in parliament. After that, he can either try to appoint a new Prime Minister or dissolve parliament and call new elections. Under Portuguese law, new elections must take place at least 55 days after parliament is dissolved. In the meantime, Passos Coelho’s government would stay on as caretaker.
Who would win if elections were held?
The Socialist party has opened a large lead by all accounts, up to 12% in some polls. However, it still looks short of the majority needed to govern alone – in the previous elections the Social Democratic Party secured 38% of the vote but only 108 seats (although as noted above a minority government is difficult but not impossible). However, despite initially supporting the reform programme the Socialist Party has become increasingly vocal against austerity and it is unclear if they would stick to the reform programme, if they came into power.[5] This would throw up serious problems, breaking the fragile cash-for-reform bargain which has been in place over the past few years in Portugal and in the eurozone more widely.
What is the most likely outcome?
Ultimately, it depends on today’s meeting of the CDS-PP and whether it decides to continue supporting the government. At the moment this seems unlikely, suggesting new elections could be on the way at some point (although Passos Coelho could drag this out by trying to run a minority government).
The Portuguese economy cannot afford further delays
Under the optimistic scenario forecast by the EU/IMF/ECB Troika, Portuguese debt is still expected to peak at 124% of GDP in 2014. Any delays will likely see this rise quickly, especially with growth already underperforming.
Portuguese ten year borrowing costs have already shot up a staggering 1.5% since Gaspar’s resignation, reaching close to 8%. This highlights the fragility of the economic situation. Only a month ago, there was widespread talk of Portugal returning to the markets ahead of schedule – now it is difficult to see how it will exit its bailout programme in spring 2014 without any further assistance (the ECB’s bond buying programme, the OMT, still remains the most likely candidate).
Deficit reduction already off-track
Over the past two years, the government has been reliant on one-off measures to meet its deficit targets.[6] In 2011 these amounted to almost 3% of GDP (allowing the deficit to fall from 7.4% to 4.4% of GDP). In 2012, they amounted to 1.7% of GDP (pulling the deficit down from 6.4% to 4.7%).[7] In the first quarter of 2013, this has already increased to 7.1% of GDP (although the deficit for the first quarter alone reached 10.6%).[8]
This year’s deficit target has already been revised upwards to 5.5% of GDP, but even that looks a stretch from the current position. Further delays would make it very difficult to reach.
Export-led growth shows positive signs but may not be enough
Although exports have picked up in recent years, they still represent too small a share to offset the falls in other drivers of GDP (and therefore economic growth). As Graph 1 below shows, domestic demand has collapsed, while government spending and investment have also been falling. Exports may be growing, but they are unlikely to grow quickly enough to offset this collapse, or far enough to restore the decline in GDP seen in recent times.
Gaps in competitiveness between Portugal and Germany increasing again
As we noted in our previous briefing (and as Graph 2 above shows),[9] the adjustment to unit labour costs has been thrown significantly off track by the Portuguese Constitutional Court ruling (which overturned some cuts to public sector spending), the increasing protests against austerity and the lack of buy-in from the private sector. This may eventually harm the export led growth mentioned above.
Contingent liabilities are significant
In many countries, the long-term burden of contingent liabilities such as pensions and healthcare are well known but in Portugal there are more immediate problems. The contingent liabilities of State Owned Enterprises (SOEs) total 9% of GDP but are excluded from government debt levels despite these companies coming under serious pressure. Many have significant debt overhangs and could be forced to turn to the government for assistance if financing conditions worsen once again. Total contingent liabilities could run as high as 15% of GDP according to the IMF. Furthermore, the stock of government arrears is around 2.6% of GDP (€4.3bn) and is owed to domestic firms meaning it remains a drag on growth.
Easing the reform programme is an option but may help little
Portugal has already seen its targets eased as well as the maturities of its loans extended and the interest rates reduced. There may still be scope to do this further, but not much. It is unlikely the eurozone would agree to such a move until a stable government is once again in control. Furthermore, with maturities and rates already extended and cut almost as far as is feasible further action seems unlikely. Delaying targets may give more room to breathe but Portuguese debt continues to look unsustainable.
So will Portugal need further financial assistance?
Any delays would likely be tantamount to pushing Portugal towards further assistance, be it OMT or some form of debt restructuring, and consigning the country to another few years of tough austerity – which would be both politically and legally difficult to implement. As we previously noted, further assistance always seemed possible – Portugal will now have to work very hard to avoid needing it.
For more information please contact the office on 0044 (0)207 197 2333, Raoul Ruparel on 0044 (0)757 696 5823 or Vincenzo Scarpetta on 0044 (0)796 924 0642.
The algos could have a problem getting out of this one. From Mrs.Watanabe (JPY -170pips, NKY -500 points from highs) getting hammered (and the Hang Seng -5%) to European sovereign bond spreads exploding (Portugal +170bps - biggest spike in 2 years to 8 month highs) and financial stocks collapsing (-4%), safe-havens are heavily bid from gold and silver (+3% from lows) to US Treasuries (10Y dropped 8bps) and global equity markets are taking it on the chin. Not pretty...
Just as Mrs. Watanabe was getting back in the water...
and hopes of China doing well slayed...
Europe is a bloodbath - especially bonds...
with Portuguese bond spreads blown out...
and European financials are getting crushed...(catching down to credit)
and safe havens are bid...
and Treasuries and US equities are back to their anti-correlated selves...
and Crude continues to surge... implying $4 gas prices coming soon...
Portuguese borrowing costs topped 8 percent for the first time this year after two ministers quit, signaling the government will struggle to implement further budget cuts as its bailout program enters its final 12 months.
Government Tensions
Social Security Minister Pedro Mota Soares and Agriculture Minister Assuncao Cristas will hand in their resignations to Coelho today, broadcaster TVI reported on its website last night, without saying how it obtained the information. Both ministers are from Portas’s CDS party.
The EU may consider extending the deadline for Portugal to meet its deficit targets if economic conditions worsen, Jeroen Dijsselbloem, head of the group of euro-area finance ministers, said on May 27. Dijsselbloem said the government hasn’t yet requested another change of timetables and targets.
On March 15, the government announced less ambitious targets for narrowing the budget deficit as it forecast the economy will shrink twice as much as previously estimated this year. It targets a deficit of 5.5 percent of gross domestic product in 2013, 4 percent in 2014 and below the EU’s 3 percent limit in 2015, when it aims for a 2.5 percent gap. Portugal forecasts debt will peak at 123.7 percent of GDP in 2014.
Gaspar’s resignation shows the risk of reforms faltering, Organization for Economic Cooperation and Development Chief Economist Pier Carlo Padoan said yesterday at the Lisbon Council in Brussels. “Fatigue may suddenly erupt and the temptation to go backward may be very, very strong,” he said.
Portugal’s beleaguered prime minister has pledged to stay in office and seek to establish a stable government despite the resignation of two key ministers and the threatened break-up of his ruling coalition.
Pedro Passos Coelho said on Tuesday night he would stay at his post and work towards a “rapid return to stability” to avert a political and economic crisis that would endanger the country’s €78bn bailout.
“I will not resign or abandon my country,” Mr Passos Coelho said.
However, opposition parties called for an early general election two years ahead of schedule, saying there was no possible solution for the governing coalition.
“The country needs a new government with democratic legitimacy,” said António José Seguro, leader of the centre-left Socialists, the main opposition party.
The prime minister was speaking hours after his government was rocked by the resignation of Paulo Portas, foreign minister, less than 24 hours after Vítor Gaspar had quit his post as finance minister.
Mr Passos Coelho said he had refused to accept the resignation of Mr Portas, leader of the conservative Popular party (CDS-PP), the junior partner in the two-party government coalition.
The government of Portugal is now burnt toast. There is no way it can survive. But will any other government do what is needed (default and tell the EU where to go)?
Eventually some country will, as soon as the pain is severe enough.
Mike "Mish" Shedlock
http://ransquawk.com/headlines/304114
Electionista report that there are conflicting reports in Portugal, with claims that all CDS-PP ministers and secretaries of state to resign, other reports claim conflicts within party
Update details:
- In terms of a break-down of the parliamentary political make-up: - Total seats in parliament = 230 - Coalition of Social Democratic Party (SDP) and People's Party (PP) = 132 seats - Majority needed = 116 seats - Therefore if the PP leave, or 17 coalition ministers resign, the current coalition will no longer hold a majority in parliament.
And just like that things are going bump in the night once more. First, as previously reported, the $100+ WTI surge continues on fears over how the Egyptian coup will unfold, now that Mursi has a few short hours left until his army-given ultimatum runs out. But it is Europe where things are crashing fast and furious, with the EURUSD tumbling to under 1.2925 overnight and stocks tumbling on renewed political risk, with particular underperformance observed over in Portugal, closely followed by its Iberian neighbor Spain, amid concerns that developments in Portugal will undermine country's ability to continue implementing the agreed bailout measures. As a result, Portuguese bond yields have spiked higher and the 10y bond yield spread are wider by over a whopping 100bps as austerity's "poster child" has rapidly become Europe's forgotten "dunce."
Secretary of State for Treasury Maria Luis Albuquerque replaced Vitor Gaspar at the Ministry of Finance. That prompted Paulo Portas, who leads the smaller CDS party in the coalition government, to quit, saying the new minister would offer “mere continuity” of the country’s deficit-cutting plans.
“It sounds the alarm bell of austerity fatigue,” said David Schnautz, a strategist at Commerzbank AG in New York. “This domestic noise is definitely negative.”
Portugal’s 10-year bond yield jumped to 8 percent earlier today, the highest level since Nov. 27, and was hovering at 7.65 percent as of 11:10 a.m. London time. The nation pays an average 3.2 percent for loans it received as part of the aid package.
Prime Minister Pedro Passos Coelho is battling rising unemployment and a deepening recession as he cuts spending and increases taxes to meet terms of a 78 billion-euro ($101 billion) rescue plan monitored by the European Union, the International Monetary Fund and the European Central Bank, known as the Troika. Coelho announced measures on May 3 intended to generate savings of about 4.8 billion euros through 2015 that include reducing the number of state workers.
The contagion effect has quickly spread to other bond markets and both Italian and Spanish 10% spreads were seen wider by over 10bps. Financials underperformed on the sector breakdown, as fears of potential liquidity squeeze, together with the latest ratings action by S&P who cut Barclays, Deutsche Bank and Credit Suisse rating to A- from A, saw credit spreads widen. iTraxx crossover and sub fin indices widened by over 15bps, while the Eurodollar curve steepened on prospect of higher borrowing costs. In terms of macroeconomic releases this morning, the latest round of Eurozone Services PMIs had little impact on the price action, however the release of much better than expected UK Services PMIs saw GBP/USD break above 1.5200 level. Finally, a weaker than expected Eurozone Service PMI print (48.3, Exp. 48.6, last 48.6, once again driven by a weaker Germany) has certainly not helped matters.
If nothing else, at least Draghi's unused (and non-existent) OMT bazooka will soon have to be used. We will see just how effective it will be.
Looking elsewhere, the army in Egypt has given a deadline of around 1530 London time on Wednesday for the crisis to be dealt with; otherwise the so-called road map will be put forward by the army which included the outline for new presidential elections, the suspension of the new constitution and the dissolution of parliament. However, an Egypt military source denied local media reports on a political road map and instead suggested that next step will be to invite political, social and economic figures to talks on vision of the road map.
A quick summary of the European damage:
Portugal 10Y yield up 89bps to 7.61%, was up 130bps at 8.023% earlier
Spanish 10Y yield up 14bps to 4.76%
Italian 10Y yield up 7bps to 4.51%
U.K. 10Y yield down 4bps to 2.34%
German 10Y yield down 6bps to 1.64%
Bund future up 0.53% to 142.44
BTP future down 0.88% to 109.77
EUR/USD down 0.13% to $1.2962
Dollar Index down 0.15% to 83.42
Sterling spot up 0.62% to 1.525
1Y euro cross currency basis swap down 1bp to -18bps
Stoxx 600 down 1.21% to 283.67
DB's Jim Reid has the full overnight rundown
The last 12-24 hours have turned into a bit of a round-the-globe Sovereign watch with Brazil, Egypt and Portugal all being highly newsworthy. Starting with Brazil, the BOVESPA (-4.2%) suffered its biggest one-day loss since September 2011, reaching its lowest level since April 2009, after the country reported weaker than expected industrial output data. Industrial production fell 2% mom (vs -1.1% expected) which is the worst result for the month of May since 1995 when industrial output contracted by 11%. As with other EM equities, the BOVESPA had a rough June. The index recorded 7 trading days with falls greater than 2% during the month, which is exactly half the number seen in the whole of 2012. Amongst the individual stock moves yesterday, there were material declines in market
heavyweights including Vale (-3.4%) and Petrobras (-4.8%) which both fell through their 52-week lows. On the credit side, Brazil’s 5yr CDS widened by about 9bp to 195bp. Conditions have also been challenging for Brazil's corporate funding markets with no Brazilian company able to price an international bond since May 15th according to Bloomberg data.
Moving to Portugal, there were signs of austerity fatigue amongst the ruling coalition government after Prime Minister Coelho lost two key ministers in as many days. The resignation of Finance Minister Vitor Gaspar was promptly followed by that of the foreign minister Paulo Portas who is also head of the smaller CDS party in the coalition. Portas reportedly disagreed with the PM’s decision to name Secretary of State for Treasury Maria Luis Albuquerque as a replacement for the FM, saying it would mean a continuation of the policies
deepening the country’s recession (Bloomberg). PM Coelho said he didn’t accept the resignation request and hasn’t asked the President to dismiss Portas due to the minister’s importance in the coalition. Portas did not say whether he would take his junior party out of the government — a step which would leave the government without a parliamentary majority. Portuguese bond yields added 33bp yesterday to 6.72% and are now up more than 140bp since the May lows. The PSI equity index finished 1.3% weaker. Elsewhere in the periphery, Greek 10yr yields jumped by 15bp after it was reported that the troika had given a 3-day ultimatum to the government to reassure international lenders that it can deliver on conditions attached to its bailout programme. The report was later denied by a spokesperson from the European Commission (Ekathimerini).
Speaking of ultimatums, President Mursi appeared on television yesterday to reject an ultimatum from the Egyptian military that he share power with his political opponents or face a military solution. In response, the Egyptian army said it was ready to sacrifice “blood…and its people” which has helped send WTI crude (+2.3% this morning) above the $100/bbl mark. At least one anti-Mursi TV station put up a clock counting down to the end of the military's ultimatum, putting it at 4 p.m. today (or 1400 GMT), though a countdown clock posted online by Mursi opponents put the deadline one hour later. The military did not give a precise hour (Associated Press). WTI has gained 17% since its low in mid-April, more than double an 8% gain in Brent crude over the same period. It will be interesting to see whether this shows up in US inflation numbers in the next few months and whether it impacts growth.
Overnight, Asian stocks are trading with a negative tone taking the lead from the S&P500 which faded into the close for the third consecutive day. Losses are being led by a -1.9% and 1.5% decline in the Hang Seng and Shanghai Composite respectively with the main laggards being Chinese banks and real estate developers. China’s official services PMI came in 0.4pts weaker than last month (53.9 vs 54.3) while the HSBC services PMI was a touch stronger (51.3 vs 51.2). On the fixed income side, Asian credit is trading about 9bp wider this morning but 10yr UST yield remain in a tight range (unchanged at 2.47% as we type). The AUDUSD is down 0.4% after disappointing Australian retail sales data (0.1% vs 0.3%) and comments from the RBA governor that the central bank will do what it reasonably can to assist the transition from a resource-led economy. S&P’s downgrade of several major European investment banking groups is also dampening overnight sentiment.
Looking at today’s calendar, Euroarea service PMIs, the US non-manufacturing ISM and ADP employment report are the three key highlights on the data docket. The last two will provide the final employment-related data points ahead of the looming payroll print on Friday. Specifically on the ADP, DB’s US economists view the ADP as the single best predictor of monthly changes in payrolls. Over the last 12 months, the average error between the difference in private payrolls and ADP has been -14k, which is quite small since the standard error on private payrolls is about 75k per month. US weekly jobless claims have been brought forward to today due to Independence Day holidays tomorrow. So these are going to be important numbers for markets. A reminder that US bond and equity markets will be shutting early today ahead of Independence Day tomorrow.
* * *
SocGen recaps the FX macro highlights
There were further gains in periphery debt prices yesterday resulting in lower yields in moves that were accompanied by broad based JPY selling and a the ascent over130.50 in EUR/JPY. It is tempting to interpolate a return of Japanese investor flows into eurozone debt two days before the ECB casts its verdict on monetary policy and before Spanish benchmark supply, but the co-movement of yields and the currency pair have been no coincidence and suggest Japanese flows may have flipped from the relentless repatriation from overseas in the spring. The 4.7% bounce in EUR/JPY from the June lows should not realistically be challenged by a dovish ECB (if that's how the press conference turns out tomorrow). The correlation of the currency pair with the US/EU 10y swap spread is only 0.41 and short JPY positions are considerably less heavy than they were six weeks ago. Option structures and flows aside, only a disappointing US payrolls report on Friday would give investors a reason to book profits. Meanwhile, Greece continues to bubble in the background as a EUR negative but the EC yesterday denied it has set the country a three-day deadline to reassure lenders if can deliver on the bailout terms. It was announced that the Eurogroup will make a decision next Monday whether or not to disburse the next EUR6.3bn bailout tranche to help cover the repayment of EUR2.17bn worth of government debt on 20 August.
A trio of key US labour market data will take precedence today over pretty much everything else. Initial claims, ADP and the ISM non-manufacturing services survey are due before US markets shut for Independence Day tomorrow. We got an inkling yesterday of the direction the market is willing to push the USD, irrespective of the fact that US yields continue to trade remarkably well in the face of Friday's upbeat employment expectations. Today's ADP and ISM releases may prove whether the calm is deceptive and the pivoting around 2.50% in cash yields and 2.70% in swaps is merely a testimony of investors playing for time before Friday and a function of reduced trading volume.
The Riksbank is expected to keep its benchmark rate on hold at 1.00% today. The bank issued a lower repo rate forecast last April and is likely to reiterate this view today without making meaningful changes to the underlying forecasts. Increases in the repo rate are not expected until the second half of 2014. For EUR/SEK, quite a bit rides on the ECB tomorrow and the UST reaction to payrolls tomorrow, but with the mean reversion move from 8.90 nearly over, SEK bears may be tempted to reload long EUR/SEK (and USD/SEK).
Meanwhile in Greece, there is growing acceptance that it won't satisfy its lenders that it is hitting its bailout targets, in time for the meeting of eurozone ministers on Monday.
In particular, Athens looks highly unlikely to meet demands to shake up and slim down its civil service, by moving over 12,000 to a new pool where they'd be parked on lower wages.
After meeting top officials from the Troika (the IMF, European Central Bank and EC) last night, administrative reform Kyriakos Mitsotakis said it would take "several months" to get the scheme right
And a senior finance ministry official has warned this morning:
There is no chance that we will satisfy the current demands as they are set out.
Greece needs to satisfy the Troika to qualify for its next aid payment, worth €8.1bn. As we've been writing for days, there's a very strong chance that it will only be paid in installments.
Over in Brussels, eurozone officials have been telling the press pack that Greece might need to wait three months until it gets its aid tranche. The WSJ's Matina Stevis has the details:
Submitted by Tyler Durden on 07/03/2013 20:40 -0400
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