The Upcoming Week In Greece And Europe

From Goldman's Eric Nielsen:

Happy Sunday,

My intelligence tells me that the weather is clearing up for another beautiful afternoon in Chiswick, while I am labouring away here in grey and overcast Washington DC where the IMF spring meetings of the world’s finance ministers and central bankers are in full flow.  These are my thoughts on Europe today:

·         Last week saw another batch of outstanding data releases in the Euro-zone making us feel very good about our aggressive GDP forecast.
·         The latest UK polls suggest more support to the Conservatives, but still a hung parliament.
·         Greece has now officially requested help; here in DC finance ministers are busy talking to each other while assuring investors that everything will be fine (I have my doubts).
·         We are heading into a week of further focus on Greece as Papandreou reported is looking to appoint a central coordinator (did Papademos really turn it down?), IMF negotiations continue and the Europeans are moving forward towards their parliamentary approvals.
·         In the rest of the Euro-zone we expect more good news on the data front this week – from confidence indicators and probably from lending numbers.
·         In the UK it’s all about Thursday night when the third, final and possibly most important TV debate among the three leaders takes place.
·         Switzerland is set to print another good KOF number this week.
·         Both Sweden and Norway are set to print business surveys, retail and labour market numbers this week; we expect good numbers.
·         Big week coming up in Poland: The last serious presidential candidate will be announced tomorrow; the central bank governor appointment may move forward and there is an MPC meeting.
·         Hungary is having the second round elections today.  Could lead to a strong victory for Fidesz followed by constitutional changes; potentially very bullish for markets.

1. Last week delivered another batch of outstanding growth indicators for the Euro-zone making us feeling very good about our recently revised GDP forecast of 1.7% for this year (vs consensus’ 1.2% and the ECB’s 0.8%).  Both the manufacturing and services PMIs for April increased to 57.5 (both from 56.6), the former mostly on the back a record-high German number and a good gain in France; the latter largely on account of a surge in the volatile French services index.  The German Ifo continues to lag the PMI in terms of level but not momentum; Friday saw it jump to 101.6 from 98.2; spectacular!  All in all, we have entered Q2 on surveys beautifully in line with our +0.8%qoq (non-annualised) forecast, and if we get Q1 (in a few weeks) at our expected +0.6%qoq, then I suspect that we’ll be heading into a wave of forecast upgrades.

2. Meanwhile, back in the UK all eyes are on the campaign.  Following the opening excitement surrounding the TV debates, the latest polls start to lean towards the Conservative:  Seven polls in recent days point towards 34%-36% support while the LibDems – in second place - are starting to drop below 30%.  Because of the electoral system, the conservatives need something like a 10% lead to secure an outright majority without which a hung parliament (and a possible Labour-LibDem coalition) becomes more likely.  On the data front, the UK disappointed this past week with a +0.2%qoq print for Q1 GDP, down from +0.4% in 2009’Q4.  We remain sceptical about the UK hard numbers; the UK PMIs, which historically are better indicators than the first actual release of where final GDP ends up, run pretty close to those of the Euro-zone, pointing to something like +0.7% growth – we’ll see.

2. Trouble in Southern Europe continues.  On Thursday, Moody’s downgraded Greece to A3 (from A2) and placed them on review for further downgrades.  A3 is still quite some rating for a country scrambling to get official money organised in the 11th hour.  I suspect that the downgrade and warning caused just about as much angst in Frankfurt as in Athens; the ECB thought that they had fixed their collateral eligibility problem a few weeks ago by moving the ratings threshold a bit, apparently not realising that the ratings agencies tend to be lagging indicators and therefore likely to be on a bit of a run now – watch this space; I am rather confident that we haven’t seen the last of the ECB’s scrambling on its collateral policy.  On Friday, the Greek government officially requested financial aid from the IMF and its fellow Europeans; inconvenient for the Germans, of course, given their May 9 election, but time is running out.  Markets loved it, but I have no idea why.  The few (and relatively low probability) obstacles for money arriving in time for their May 19 payment surely did not include the possibility of the Greek government deciding not to apply for the money!  Maybe investors were impressed by the fact that the announcement was made while Papandreou was visiting Kastelorizo – an island of 500 people – to discuss another important policy objective, namely that of getting more people to live on small remote islands!  Meanwhile here in Washington, finance ministers are talking to each other and to investors (with the exception of Greek finance minister Papaconstantinou who is staying clear of any interaction with investors this time around.)  French finance minister Lagarde (and others) continues to rule out a debt restructuring, and she is reported to have said that a default would lead to a cut in French aid to Greece.  She also said that the European loans would not be senior to commercial money, although other European officials seem to have contradicted this; clearly European policymakers still have a few more details to agree on.  The US has been surprisingly quiet in this whole saga (it’s certainly the first sovereign debt crisis that I can recall with the US sitting in the backseat.)  Following a meeting yesterday between Papaconstantinou, IMF’s Strauss-Kahn and US secretary Geithner, a treasury statement  said that “Secretary Geithner encouraged them to move quickly to put in place a package of strong reforms and substantial concrete financial support.”  No disagreement here! 

Turning to this coming week:

4. Greece will remain in the spotlight.  Reportedly, PM Papandreou is planning to appoint a central coordinator for the government’s interactions with the IMF and the European counterparties.  According to the FT, highly respected outgoing ECB vice-president Papademos has turned down the offer of the post, which – if confirmed - makes me wonder whether Papademos sees what I see, namely an overwhelming probability that we are indeed heading towards a debt restructuring, and being in the middle of this mess is just not the way he wants to end his fine career.  I’ll be curious to see who agrees to take the job; it could be an important indicator for how this all plays out, including the timing of events.  IMF negotiations continue and will presumably pick up pace once Papaconstantinou returns to Athens, but on my schedule they really need to get done around May 6 so that disbursement can take place before May 19.  In the European capitals, draft legislation for the loans is likely to be presented in several parliaments this coming week, including in Germany, but no decisions at least for another week or so.  The whole thing is moving terribly close to the wire, so one must hope (and assume) that bridging arrangements are being put in place in case something slips.

5. For the rest of the Euro-zone, this week will see a number of important data releases, starting with confidence indicators.  French and Italian consumer confidence will be published on Tuesday (EMAP relevance scores of 3 and 1, respectively); we expect small further improvements in both countries – to about -33 in France and 108 in Italy.  On Wednesday we get Italian business confidence (EMAP 4); also here do we see a small improvement to about 86.2.  Finally on Thursday we’ll get the Euro-zone business and consumer confidence numbers (both EMAP 4), and they should both improve a tad, probably to something like -8 and -15, respectively.  Also on Thursday the ECB’s M3 report for March will be printed (EMAP 0).  Following months of decline, lending to firms stabilised last month so it’ll be exciting to see if we have finally turned the corner getting positive growth here.  If so, it would bode well for capital spending going forward, actually then running a tad ahead of our bullish GDP forecast.  Lending to households already turned a couple of quarters ago.  On Friday, we’ll get the latest update on employment conditions across the Euro-zone (EMAP 4). We expect unemployment rates in most countries to have crept up again in March as labour markets are still on the mend. The Euro-zone aggregate unemployment rate should show a minor increase from 10.0% to 10.1%, and we expect it to grind higher during the remainder of this year only to peak in early 2011.  Friday will also bring the latest flash estimate of Euro-zone headline inflation. The March headline print surprised on the upside, rising from +0.9%yoy to 1.4% on the back of both energy and core goods price increases, but we expect a more tempered increase this month to 1.5%.  While still low in the aggregate, these are important numbers as part of the periphery needs to deflate (as has already started in Ireland and Spain.)  Running monetary policy for such diverse economies will be tricky.  For a discussion of the inflation story, see Dirk Schumacher’s piece in last Thursday’s European Weekly Analyst.

6. The highlight in the UK this week will surely be the third and final debate between the three political leaders on Thursday night.  As the key topic will be the economy, this could be the most important of the three debates and one that might shape the next government and hence policies in the UK for some time, re the latest polls discussed above.  The week will be thin on data releases:  The CBI Distributive Trades Survey on Tuesday and the GfK Consumer Confidence indicator (a poor indicator of spending) on Friday.

7. In Switzerland, we’ll get the KOF Leading Indicator for April on Friday morning.  Having registered its eleventh consecutive rise in March, the headline index now reads 1.93 – consistent with robust above-trend growth in the Swiss economy.  Given the heights now reached, maybe it’ll give back a bit this week, but nothing to worry about.

8. In Sweden there are three releases of note this week: First the KI/NIER Economic Tendency Survey (EMAP relevance score of 5) for April is released on Thursday.  It checked its ten-month surge in March, falling slightly to 107.0 but continues to signal robust above-trend growth in the economy. We see some further upside this week.  Second, retail sales data for March also on Thursday; we expect +0.5%mom against a consensus expectation of +0.7%mom.  Third, labour market data for March are released on Wednesday (EMAP relevance score of 3). On the non-seasonally-adjusted headline rate, we expect a small increase from 9.3% to 9.4%.

9. Norway also has three important releases this week:  First, we get Statistics Norway’s Business Tendency Survey for Q1 on Wednesday; we expect further gradual improvements across the board.  Second, we get retail sales (EMAP: 2) for March on Thursday: we expect a second consecutive increase of +0.5%mom. Third, we will have registered unemployment data for April on Friday; we expect the unemployment rate to come in at 3.1%, flat from March.

10. Lots of important stuff in Poland this coming week; look out for emails coming from Magdalena Polan as things develop.  First, the deadline to nominate candidates in the early presidential elections expires tomorrow Monday at midnight. PiS, the party of late President Kaczynski, has not yet announced who would run from their side. It’s very likely that twin brother Jaroslaw will run, but even with the possible sympathy vote, the latest polls indicate that he won’t be able to beat the front runner, Speaker of the House and acting President Bronislaw Komorowski from Civic Platform.  If Komorowski wins, pro-reform and pro-European Civic Platform will hold the most important levers of power, which should be very market friendly.  A Jaroslaw Kaczynski  presidency would complicate matters on a number of policy issues, including vis-à-vis the rest of the EU.  Second, acting President Komorowski may announce this week when the new head of the central bank will be named. Komorowski requested legal expertise on the precise extent of the acting Governor’s role – if it turns out to be smaller than that of a Governor, the appointment will be brought forward.  Finally, at the Polish MPC meeting on Wednesday we expect no change in rates or bias but are looking forward to the MPC statement and the press conference to learn more about the MPC members' views on the recent FX intervention and any future steps intended to weaken the zloty and the resolution of the NBP profit definition dispute.

11. The second round of the Hungarian parliamentary elections takes place today Sunday. Fidesz, the poll leader, already won a simple majority of seats in the first election round on April 11.  Amassing a qualified majority (2/3 of all seats) after the second round would give the new government an unprecedented strong mandate and let Fidesz introduce constitutional reforms and other major legal changes without seeking support of other parties. This would also mean that in exchange for relaxing fiscal conditionality under a new IMF-led program, the new government would be able to introduce structural reforms of the public sector and other major changes that would lead to substantial fiscal savings in the medium and long term.  Magda Polan has pointed out that this would be a positive development for the currency and the risk perception, but a failure to reform quickly and speed up growth would erode the confidence in the new government and the economy.  Tomorrow after the elections, we expect the NBH to cut rates by 25bp, bringing the policy rate down to a historic low of 5.25%.  Domestic and external developments should offer the Hungarian MPC sufficient arguments for another cut - both Forint volatility and CDS spreads have fallen in recent months, inflation is on a declining path despite a small jump in March, and the economy is recovering only slowly.  What's more, the MPC is still in the easing mode as demonstrated by the last month's rate vote.  Going forward, we expect one further cut later this year which would bring rates to a trough of 5.0%.

… and that’s the way Europe looks on this grey day in Washington DC (a city still so terribly close to my heart).

Best

Erik Nielsen

Comments

[Eally Ucked]

This is complete madness, the whole nation (with few exceptions) will turn beggars for 60 billion $ when few execs and their helpers at Goldman split more than 200 billion as yearly bonuses. But I know all Greeks brought it on themselves, they can retire early and their vacations are much too long. 

[mikla]

... and that's the way Europe looks on this grey day in Washington DC (a city still so terribly close to my heart).

...because that's how you get rich skimming from morons.

[anynonmous]

My intelligence tells me that the weather is clearing up for another beautiful afternoon in Chiswick

Seems like a bright fellow

[ElvisDog]

The problem with this article is that I don't trust anything that any Goldman employee releases for public consumption. My default reaction is to think that reality is exactly the opposite from what is written and GS is just getting ready to take the other side of their published "analysis"

[Hansel]

I agree.  Reading this email made me think Erik is paid to be bullish.  He has also been wrong about his euro calls and the faith he has put in the Greece bailout through all the weekly iterations of the "bailout".

[GFORCE]

http://www.ghanaweb.com/GhanaHomePage/NewsArchive/artikel.php?ID=180487

ElvisDog, this will be right up your street.

[glenlloyd]

there's little substance and too much blithering. all of that could have been said in a couple modest paragraphs.

[Mongo]

Well, anything coming out of a goldmanite should be consumed with a vomitbag at ones side.

[Fritz]

Nice optimistic outlook from another squid mouthpiece.

[Grand Supercycle]

Next DOW key resistance is 11,250/300

If that level is penetrated next target is 11,900

MARKET UPDATES:
http://www.zerohedge.com/forum/latest-market-outlook-0

[Jake3463]

When can I order a Greek Bride online?  I mean that is generally the result of IMF intervention women trying to leave the country.  My big fat greek wedding to a mail order bride has reality show hit written all over it!

[BlackBeard]

Not gonna happen, Orientbrides.com has everyone underpriced, the Russian bride brokers got a lock on the rest of the market.

[Mr Lennon Hendrix]

In 2 and 1/2 years, Americanbrides.com is going to give everyone a run for their money ;)

[QQQBall]

And who is gonna bid on an American bride? The idea with bridesonline is to get a smoking hot chick that thinks your rich, not a fat saggy nag that will make you poor. 

[RobotTrader]

Looks like once the Greece situation is resolved, the markets are free to go into "Parabolic Mode".

Retail stocks have already begun the "Terminal Blowoff Phase", which could last up to 4 months as the Nasdaq did in late 1999 - early 2000.

[Mr Lennon Hendrix]

Down week next week by roughly 65 points (Treasuries, Goldman/Greece news, Op/Ex), then everything to the moon.  Gold, silver, and oil will continue to lead the markets.

[RobotTrader]

Note the setup in some of the European banks.

These stocks could easily go vertical:

[RobotTrader]

The biggest money will probably be made here:

You can see it already happened to RBS:

[Mr Lennon Hendrix]

Sincerely, I will take your word for it.  Why though?  Why invest in craptacular banks?  Because they are set to make a boatload of loans, which will spur hyperinflation?  This creating "mad money" on their fractional reserved books?

[M.B. Drapier]

AIB Daily

*weeps quietly*

[Mitchman]

Other for comic relief, why do we even bother with this blather.  We should just make a chart with two columns.  Column 1 "prediction.  Column 2 "outcome".  The only entries allowed under column 2 are either wrong r right.  I will publish the chart at the end of the week.  Maybe TD can then send it to him.  Better yet, send it to the squid's clients who traded on his advice.

[Amish Hacker]

bridging arrangements are being put in place in case something slips.

Why does this sound like they're setting up a "payday loan" for Greece when the inevitable happens? 

[Privatus]

Tentacular. But seriously, why is this marketing material even given a first thought? As if Goldman - or anyone - can accurately predict the future. They manifestly cannot. Their toutological missives are pure noise.