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Week Ahead: Greece Casts Long Shadow while US Economic Momentum Strengthens
The Greek drama is approaching the long awaited climax. An emergency heads of state summit will be held on Monday, followed by the regularly scheduled summit later in the week. At the same time, the banking crisis threatens to eclipse the sovereign crisis in terms of urgency.
The accelerated flight of deposits from Greek banks, and the two extensions of ELA lending last week warn of the untenable status quo. Without that extension of ELA lending before the weekend, an ECB official expressed concern that Greek banks might not be able to open on Monday
European leaders use the threat of a Grexit to try to force the Greek government to capitulate. There is no necessary economic connection between default and being forced out of monetary union. Greece's has restructured its debt to the private sector in 2012 within the monetary union. Cyprus bailed in depositors and instituted capital controls within the monetary union.
Common scenarios of an exit from EMU were based the hypothetical desire from very strong (Germany) or the weak (Italy) country to return to their own currency. This is not the case in Greece. The people are not crying for a new drachma. Many understand what so many economic observers do not: Greece suffers from the lack of a significant export sector. This means that the projected advantages for Greece of devaluation are often exaggerated.
Nor is it clear precisely what high law or treaty that a default would violate. By the highest law, the euro is an irrevocable currency union. European officials take pride in the rule-based system, and yet they threaten to abandon those same rules when it is convenient or politically expedient to do so.
In moralistic terms, which seems to imbue discussions of the responsibilities of debtors, the original sin here is not that Greece lived beyond its means. After all, this predates the existence of the monetary union. Moreover, the debt overhang problem affects all countries in the euro area, including Germany. Indeed Germany's refusal to expand fiscal policy (and, in fact, pay down some of its debt) despite low interest rates and the fiscal consolidation elsewhere is a source of much consternation in Brussels and Washington.
Rather, the original sin here was the European governments violation of the Stability and Growth Pact and Maastricht Treaty prohibitions against fiscal transfers. They gamed the rules by making loans to Greece that were used to service its private sector debt. European officials recognized the unusual nature of what they were doing and created institutional capacity (e.g., EFSF/ESM) and bail-in rules so they would not have to do it again. This is to say nothing about their motivations, which may have been noble (broad contagion), mercenary (protect large banks), or base (pride).
II
The US economy is accelerating. Data in the coming days will show that consumption, capital expenditures, and home sales are improving. Durable goods at the headline level may be held back by the drop in Boeing orders (11 vs. 37), which some attribute to the normal slow down orders before a large airshow (Paris). However, the details, orders, excluding aircraft and military orders, which is a proxy for capex, is expected to rise 0.5%. This would do a little more than offset the decline in April. However, the Q4 14 and Q1 15 monthly average was a decline of 1.2%.
Similarly, shipments excluding aircraft and military goods is used to calculate GDP. The monthly average in Q4 14 and Q1 15 was -0.5% and -0.6% respectively. Even if May is flat, the three-month average would be positive.
Existing home sales are expected to recover from April's 3.3% decline while new home sales are expected to gain on top of April's 6.8% gain. The best news though will likely be in May personal income and consumption figures. Income is expected to have risen by 0.5%. It has averaged 0.3% over the past three and six months. Expenditures are expected to rise their most since last August (0.7%). The strength of the retail sales suggests upside risk here. A 0.9% gain match the August 2009 gain recorded as the US was emerging from the recession. Personal consumption expenditures have averaged 0.2% over the last three months and 0.1% over the past six months.
It appears the US economy is growing here in Q2 at probably a little more than a 2% annualized pace. At the same time, the contraction in Q1 appears to have been largely revised away. What was a 0.7% decline is likely to be revised to as little as -0.2%. The revision is too backward looking to elicit much of a market response, but it is important. It means that the US economy is likely to expand around 1% in H1. The lower end of the Fed's new central tendency is 1.8%. That is unduly pessimistic. It implies no improvement in H2. This in turns means that Fed has over-corrected, and it can be in a position to raise its forecast in September when it could raise rates (as we expect).
III
There are a few other economic reports that will draw attention, but are unlikely to have much market impact. First, the eurozone flash composite PMI may slip for the third consecutive month. However, it is still largely matching the Q1 increase, suggesting the area is expanding around 0.3%-0.4% in Q2. Second, eurozone money supply and credit is expected to continue to improve. Under the conditions of QE, repos fully allocated at a fixed rate, and TLTRO, it is not very surprising. Third, the German IFO is expected to soften. Given other survey data and the fall in the DAX, it is not so erosion in sentiment is not surprising.
Japan issues reports on its labor market and inflation. Like the US, UK, and Germany, Japan 's unemployment is approaching levels that economists expect wage pressure. That was last week's story that helped sterling outperform. In Japan, there are some preliminary signs as well. Japanese households appeared to wage a consumer strike in the face of last year's sales tax increase. However, they are returning to the shops. The year-over-year pace of overall household spending is expected to turn positive for the first time since March 2014.
The BOJ has already cautioned that CPI is likely to remain around zero for a few more months. The May national figures may even show some slippage. Tokyo's June figures should disabuse economists and government officials from thinking this is about to change. Importantly, BOJ Governor Kuroda has succeeded in decoupling near-term underperformance of inflation from expanding QE.
IV
Separately, HSBC reports its flash manufacturing PMI for China. It appears that the stimulative measures are helping the economy stabilize at somewhat lower levels of activity. China's stock market may swamp economic impulses after recording its worst week (Shanghai Composite fell 13%) since 2008.
Trading in four hundred companies hit their daily loss limit before the weekend. Chinese stock have been a tear over the past year. The median stock, according to Bloomberg, has a P/E of 95x. Aside from valuation issues, which has no appeared to deter buyers, the proximate triggers may include the more than two dozen IPOs that tied up CNY6.7 trillion and disappointment that the PBOC did not cut reserve requirements or provide as much liquidity as expected.
The Shanghai Composite gapped lower before the weekend and closed on its lows, which makes another gap lower opening on Monday more likely. The technical tone is vulnerable, and from this perspective another 5-10% near-term decline looks possible.
The Japanese stock market is also at interesting crossroads. Its eight-month uptrend was violated on a closing basis last Thursday and Friday. However, here the technical tone is more constructive. The Nikkei settled near its highs before the weekend, and technical indicators are supportive. Recall the BOJ is buying stocks as part of its QE operations. Pension funds continue to diversify away from JGBs and into stocks (and foreign assets). As part of Abe's third arrow, the new emphasis on shareholder value facilities stock buyback schemes.
The German DAX is trying to stabilize. Last week it fell to its lowest level since February. It has surrendered half of this year's gains. That retracement level is found near 10,885. Although on an intra-day basis the DAX has traded through there, it has not closed below. A convincing break would suggest potential toward 10530 while a move above 11250 would begin improving the technical tone.
The S&P 500 made recorded its best week since the end of April, rising 0.75%. Even though it is poised to make new highs, it remains broadly sideways. It is up 2.5% year-to-date. The NASDAQ set new record highs before consolidating before the weekend. It is up about 8% in the first half after last week's 1.3% rise. At record levels, chart based resistance is meaningless. However, provided that support is found in the 5040-5080 band, the technical tone will remain constructive.
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Shit, knew it was too late. .....
I'm sure this is way too late for any replies..
M2M: I am being absolutely sincere when i say that you are smarter than me by a damn sight. Many readers here who are not frequent commenters are here to learn. So a few questions:
You say "the contraction in Q1 appears to have been largely revised away." What were the revisions? Was it the (double) seasonal adjustment? Birth/death model? Inflation multiplier (if that's the right term)? All of those leave a lot of room for fudging. All of my research leads me to completely distrust not just Inflation reporting, but most all statistics from the BLS. Is that your source?
(Ditto to your comment above: "There is this little thing called evidence. US economy contracted in Q1 but not in Q2.")
And I'm not afraid to expose my ignorance here, but in terms of your comment "personal consumption expenditures suggest otherwise" (meaning, increasing?) - what % of that rise is for Obamacare & higher gas prices, are those figures included? If they are, that doesn't seem to paint a positive picture. Could you reply with a post to the sources where this comes from. I am absolutely sincere, just highly skeptical, and I would rather study the raw data and sources than take either expert columnists or ZH commenters at face value. (although the ZH commenters are a damn sight more entertaining and convincing).
Thanks!
skilyhog, my understanding is that the double seasonal adjustment issue has not been addressed yet by the BEA. Rather capex appears to have been stonger and retail sales (consumption) has been revised higher. Remember that the data is accumulated and often revised, unlike say in China, where the data is "known" a few days after the quarter ends and it is only marginall revised. I am open to other sources of data than the government. For example, we us PMI and ISM data. We use auto sales data. But how else does one measures GDP for the country as a whole? Eeen Tylers use govt data when it suits them or their purposes. We can adjust for prices to look at volumes. GDP is reported in real terms, which means adjusted for inflation. Why would the govt, if it was fuding numbers, allow a negative print to GDP? Why would they show such uneven growth and so low? To have a reasonable conversation, we have to agree on terms. How the government calculates GDP is in the public space. I am saying that the 0.7% contraction in Q1 is likely to be revised based on more recent data to show a smaller decline. The US reports the data on a annualized basis. A 0.2% contraction, for example, means that Q1 contracted by 0.05%, which I say, given the imprecision of the data is stagnation. I am saying that the data for Q2, including data to be reported this week, is consistent with growth closer to 2.0%+ annualized in Q2. The point here is not to forecast what the ZH commentary section believes, but what the govt will report, which is what investors and businesses use for input into their decisions.
Both the logic and the English grammar of this item leave something to be desired. The author bases his argument on various projected, expected and hoped for numbers that are not very solid. He fails to mention that the 2012 adjustments of Greek debt were based on a number of commitments by the Greek government that have not been fulfilled, hence the current impasse.
Fed mouth peice, Drunk or Charlie Brown cartoon voice?
Thank you Professor. I read your disclaimer and you could seriously be a part of the problem. People who talk/write and say don't trust a word I say are not to be trusted.
Is that really what the legal disclaimer says or does it say I am relying on the best information I have and it may not be complete and that you are responsible foir your decision making ? I think that you'll find that I did not have a legal disclaimer on my earlier work. I was instructed that legally I must have it. Somehow, when the Tylers cite bank research those banks have disclaimers, I don't recall you taking them to task.
"The US economy is accelerating."
sorry dude, but not in the direction you are trying to sell.
These Wall Street douchebags like Marc have no idea what "main street" looks like all across the country. I could give literally dozens of examples from what I have seen over the past few years but what's the use? They don't listen to the facts and are delusional and completely out of touch with reality.
And Bay of Pigs does not let data influence her opinion. How smart and sassy.
I think that you have overlooked something: the consumer is not convinced by your data and that's because they dont have the cash to spend. To make matters even worse the talk of rising interest rates resonates even more negatively on them. Without an increase in consumption the economy has no place to go, consumers are tired of the economic trash data that they know is just "social engineering". If it were the rich that created jobs, both you and the rich could engineer an economic turn around but you can't.
"The US economy is accelerating."
Yes. But not upward.
There is this little thing called evidence. US economy contracted in Q1 but not in Q2.
"remains broadly sideways" ... new term? Kinda like my waistline.
it means: take an aggressively neutral position in the assets discussed
"A convincing break would suggest potential toward 10530 while a move above 11250 would begin improving the technical tone."
You don't say.
These meaningless weekend technical blah pieces are becoming as predictable as the runs after a dose of croton oil.
If Q2 GDP is shitty at the first report, and then revised downward later to slightly below zero growth - that would meet the definition of recession, would it not? (2 consecutive quarters of GDP contraction). Which means somewhere in late summer the government will admit what everyone already knows. End of ZIRP in 2015? Don't think so. Rather, a re-enactment of QE.
The irony here is that the US economy did not implode because the Fed printed $4 trillion of debt money under the cover of the dollar as the world's reserve currency. This way, the foreign military adventures can continue without a hit to the US Treasury. However, the hit that will come will be the inability to pay back principal, never mind the low interest, on a plethora of malinvestments that can only breathe and survive in a ZIRP bubble atmosphere. Also, 93 million Americans who could be in the work force are not, and this seems to be the problem that Yellen gets paid not to notice. end rant...
Always enjoy your weekly kick-off marc.
Re this:
Looking at the protracted global macro trend, rather than quarterly adjustments, I would not expect much. As I see it, H1 is about 'right', namely, slipping into a slow in, and slow out global recession. How it is expressed in the US is anyone's guess of course, but no improvement in H2 is probably a good call.
The discussed US data look rather weak. Normalized for fudging the figures look disastrous.
Excuse me but the real US economy is in the tank. Go to any mall or restaurant outside of Washing DC or NYC and a few other places where the upper crust supports a local economy and it is a total dead zone!
Epicurious--Retail sales and personal consumption expenditures suggest otherwise. Thesre a national figures. Not simply Washington Dc or NY. Americans, like it or not, are shopping. Yes and by all means don't get your hands dirty in the data or evidence.
Epicurious--Retail sales and personal consumption expenditures suggest otherwise. Thesre a national figures. Not simply Washington Dc or NY. Americans, like it or not, are shopping. Yes and by all means don't get your hands dirty in the data or evidence.
One of the anchor spots in my local mall has been empty for three years. That whole wing is suffering. Two local sporting goods stores that had been open for over 10 years have closed in the last year and a half. But we did add a couple mid-range national restaurants and they seem to be doing alright. I think we are looking at aging Boomers going from buying 'things' that they don't have any more space to store, and instead going out to dinner more often.
. There is no necessary economic connection between default and being forced out of monetary union.
Garbage. The connection is that German taxpayers are sick and tired of paying Greek pensions.
Really? How much have the Germans paid ? And what of the German banks that lent to Greek's so they can spend in excess of their income? What about those profits? Defaulting to German banks is not the same as defaulting to German tax payers? The ECB, EU and IMF gave Greece money so it could pay private sector creditors.
Oh, the Germans will pay, just wait and see. If a lender lends to a scam artist, who’s the fool that is equally to blame? German bank stock is going to take a pounding because there is more of the same coming down the pipe. The Germans will pay and that’s why Merckel has to keep threatening. The rock has no water in it, so keep lending or the empire (EU) will tale a severe hit perhaps jeopardising its own existence. The fact is these issue are politically driven, its not the money that’s driving this, its politics, you just have to listen to that bitch Christine Largarde to get the picture.
"German taxpayers are sick and tired of paying Greek pensions."
I have a solution. Free money from ECB QE.