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Daily Commentary | 06/04/15

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• Greece to pay IMF; will it pay its own people? Greek Finance Minister Yanis Varoufakis Sunday confirmed to IMF managing director Christine Lagarde that Athens will meet the EUR 458mn debt repayment to the Fund on April 9. The two officials held talks for about 2 ½ hours in Washington and Lagarde issued a brief statement after the meeting confirming that Greece had no intention of missing Thursday’s repayment. Repaying the IMF first is a huge concession on the part of the Tsipras administration, which came into office with a pledge to renegotiate all such agreements.

• The big question for Greece now is, can it meet next week’s bill for salaries and social security payments? Better-than-expected tax collection, postponing some budget expenditures and borrowing from some state entities made it possible for the government to meet all its payments last month. Assuming tax revenues remain on track and more general government entities lend to the state, the country may be able to meet its obligations to creditors this month too, totaling almost EUR1bn. It will face another big hurdle in May, when it has to repay a total of EUR 963mn to the IMF.

• The problem is that these payments, combined with continuing deposit outflows from local banks, have tightened credit conditions and may send the economy back into recession. Real GDP contracted in Q4 2014 and may well have contracted again in Q1 2015. The manufacturing PMI has been below 50 since last September. It’s going to be hard for the Greek government to raise more in taxes from an economy in recession. Against that pessimistic background, the market will be waiting to hear what comes from Tsipras’ planned meeting with Russian President Vladimir Putin during a visit to Moscow on April 8-9. I expect that given Russia’s own financial problems, Tsipras is likely to get no more than tea and sympathy. In any event, the Greek drama should continue to fascinate the markets and hold out the possibility of a crisis. But so far, the Greek government seems to be favoring its creditors over its voters, which should keep the markets happy.

• US employment report: weak, weak, weak Friday’s employment report was weak, no doubt about it. Many observers had wondered how the US economy could generate such strong employment growth when other economic indicators were relatively weak, and the answer is, it can’t. The weather swung from a positive in February to a negative in March while the underlying pace of job gains also appears to have slowed notably. The average workweek also fell. The unemployment rate declined slightly but for the wrong reasons: the participation rate declined and the household survey employment report was once again quite soft. The only good news in the report was that earnings were a bit firmer. The market had already been discounting a slower pace of tightening, but nonetheless Fed funds futures jumped, pushing expected rates at the long end down 10 bps. The expected Fed funds rate for end -2017 has now fallen by 58 bps from the peak on 6 March to only 1.485% and the market has pushed out the time of the expected first rate hike to October (or March of next year, depending on whether the first move will be to push the rate up to the top of its current range of 0-25 bps or to reset it entirely to 50 bps).

• It’s no surprise then that the dollar was weaker this morning against all the major currencies and almost all the EM currencies that we track. The usual pattern though seems to be a big reaction on payroll Friday and some reaction in the opposite direction the following Monday, when investors look at the rates and reason that they’ve gone too far. Today may be different in that a lot of Europeans didn’t get a chance to participate in the market on Friday. Still, they may decide to take advantage of the higher EUR and sell. It’s notable that the pair was once again unable to remain over the 1.10 level. I see a small dollar rebound this morning.

• Today’s highlights: Today is a relatively light day with no major indicators during the European session.

• In the US, we get the labor market conditions index for March. This is a monthly index that draws on a range of data to produce a single measure to gauge whether the labor market is on the whole improving. Following the weak labor report on Friday, a strong LMCI index will probably not be enough to reverse the short-term negative sentiment towards USD. ISM non-manufacturing PMI and Markit service-sector PMI both for March are also coming out.

• From Canada, Ivey PMI for March is to be released. The RBC manufacturing PMI released on Wednesday rose a bit, but stayed below the 50 level that divides contraction from expansion. Nevertheless, increase in the RBC figure doesn’t necessarily imply a rise in the Ivey figure, which is more closely watched by the market. Therefore, a failure to break above the 50 level could weaken CAD somewhat.

• New York Fed President William C. Dudley will speak on the national and regional economies. Dudley is known to be dovish. In late February he said he thought the risks of lifting rates “a bit early are higher than the risks of lifting off a bit late.” The market will be looking to hear his take on the economy following the much slower-than-expected US employment data for March.

• On Tuesday, the spotlight will be on the Reserve Bank of Australia policy meeting. In their last meeting, the RBA surprised the markets and left the official interest rate on hold at 2.25%, despite expectations of a back-to-back rate cut to battle easing inflation. This week, the median forecast by Bloomberg is for the Bank to remain on hold again and instead cut rates at its meeting in May. On the other hand, the implied probability as measured by futures and options shows more than a 75% chance for a rate cut at this meeting. Our view: We expect the RBA to cut rates this time to counter the fall in the price of iron ore in order to boost the economy and prices. If this happens, it would probably put the AUD under selling pressure.

• In Europe, we get the final service-sector PMIs for March from the countries we got the manufacturing data for on Wednesday. This could support EUR somewhat.

• On Wednesday, the Bank of Japan ends its two-day policy meeting. Market expectations are for no change in policy at this meeting and the focus will most likely be on Governor Haruhiko Kuroda press conference afterwards. At their last meeting, the Bank left its policy unchanged and admitted that CPI inflation “is likely to be about 0% for the time being, due to the effects of the decline in energy prices”. A stance similar to that of their last meeting is likely to have limited impact on USD/JPY.

• In the US, Fed releases the minutes from its latest policy meeting, when officials dropped the “patient” phrase from their post-meeting statement. Following Friday’s weak employment data, the market will be particularly keen to learn what the FOMC members were expecting for the economy in Q1 to see if the employment data might have changed their view. We believe that September seems the most likely date for the Fed to start raising rates and the US dollar is expected to regain its glamor, especially as the alternatives within the G10 become less attractive with their easing biases.

• On Thursday, the Bank of England meets to decide on its policy rate. There’s little chance of a change, hence the impact on the market should be minimal, as usual. The minutes of the meeting however should make interesting reading when they are released on 22nd of April.

• On Friday, the main event will be Canada’s unemployment rate for March. The forecast is for the unemployment rate to remain unchanged, and the employment to show no change from the month before.

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