IMF unconditional debt relief for Greece

May 24, 2016

FX News Today

RBA Governor Stevens: Very committed to inflation-targeting monetary policy, inflation very low and below the RBA’s target, inflation target is not rigid and the inflation target does not demand kneejerk responses. Inflation targeting will work well into the future and finally there is quite some years of fiscal repair work for the government in the period ahead. More Dovish tones from Governor Stevens,  AUDUSD down from overnight highs of 0.7256 to 0.7222 following his comments.

IMF “unconditional” debt relief for Greece: The conclusion of its debt sustainability analysis (it’s first one of Greece since mid last year). The 10-year Greek yield was down by 28 bp, putting yields at the lowest since last November, after the Greek parliament today passed the latest EUR 5.4 bln austerity-measures package, which will qualify it for a EUR 11 bln injection of bailout cash. This should make it a formality for Eurozone officials to sign-off on at today’s Eurogroup meeting. The IMF warns that Greek debt, which currently stands at 180% of GDP, would shoot to 300% of GDP without debt restructuring.

More Mixed US data : US Markit manufacturing PMI dipped to 50.5 in flash print for May, the lowest since September 2009. The index fell to 50.8 in April from 51.5 in March. It was 54.0 a year ago. The index hit a high of 57.9 in August 2014 and has generally been on a downward trajectory ever since. New orders declined versus April and are expanding at the slowest rate since December 2015, in large part thanks to weakness from foreign demand. But, input prices rose for a second straight month, though inflation remained moderate overall and was running at a slower overall pace than the series average. The recovery in producer sentiment from winter lows is proving more anemic than hoped, though sentiment has still increased on net since February despite May setbacks for the Empire State and Philly Fed headlines. The ISM-adjusted average of the major measures is poised to sustain the 51 April figure, following a 53 eight-month high in March, but much lower 49 averages in January and February. The employment components for both Empire State and Philly Fed increased, and we saw further gains in the Philly Fed price component as oil prices rebounded.

Fedspeak: Fed’s Williams repeated 2 to 3 rate hikes seem about right for 2016, with 3 or 4 in 2017. The timing will depend on economic data, he cautioned, adding the Fed will move slowly on removing accommodation he added. The FOMC will leave the balance sheet as it is for now. He forecasts about 2% growth for this year, though there are some headwinds from abroad, but it’s important that the Fed doesn’t overreact to financial market turmoil. He remains concerned about low inflation expectations, however. He sees encouraging signs that wages are picking up, though low wages remain a puzzle. There’s nothing new in these remarks from Williams, who is not a voter this year. Earlier, Bullard, a voter, speaking from Beijing, noted some data are supporting the FOMC’s views for rate hikes, while other reports are supporting the lesser views of the markets. There are some signs that U.S. growth is below trend, though the labor market’s performance has been very good.

Main Macro Events Today

German Final Q1 GDP: German Q1 GDP, which is likely to confirm overall growth at 0.7% q/q. The quarterly growth rate is much stronger than initially expected, and the breakdown, which will be released for the first time, likely to confirm that overall expansion was boosted by strong consumption and domestic demand. Survey data already points to a slowdown in growth dynamics in the second quarter and the different timing of Easter this year may distort comparisons, so that the first half of the year may have to be seen as a whole.

German May ZEW: German ZEW Economic Sentiment is seen improving to 11.4 from 11.2. Markets are starting to digest raised bets of a June Fed hike and with oil prices moving higher investor confidence seems to remain underpinned. Reduced Brexit bets may also help, but much will depend on when responses came in and there still is some risk of a negative surprise amid uncertainty as the period of ever easier monetary policies across the world is slowly coming to an end.

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