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Europe Decides: Fears Of Grexit Contagion

Europe Decides: Fears Of Grexit Contagion

These days, very little attention is being paid to regular economic data releases from Europe, as the Greek saga dominates market reaction. Negotiations are ongoing after Greece submitted a renewed proposal on Thursday night, an effort hailed by France. Deliberations on how to keep Greece in the euro have now extended to Sunday, as hardliners are determined not to let Greece off the hook so easy. The euro rallied about 200 pips against the dollar on Friday, after Greece submitted the proposal, on high optimism that a deal may finally be close. Fed Chair Yellen also spoke on Friday, reiterating what we already know, that an interest rate hike is to come ‘later this year’.

Rate Hike Expectations

The FOMC minutes released last week showed that the Fed are optimistic about the economic developments so far, but are being cautious of international contagion, specifically from China and Greece.

It is clear that rates will be raised this year, as reiterated again by Fed chair Yellen in her speech on Friday. What remains unclear is the “when.” Markets largely expect September, as many inpidual FOMC members have stated that they expect two rate hikes this year.

Employment remains strong, but the weak consumer spending impresses the central bank less. Data coming from the US now is mostly being interpreted in the light of how it could potentially affect the Fed’s decision to raise rates. In the upcoming week, we have core retail sales and retail sales figures scheduled for release, which will give further insight into consumer spending. Also, we have the CPI, another key factor to consider, as it clarifies the inflation situation.

It’s Judgment Day For Greece

Hailed by many as a reasonable proposal, Tsipras’ latest plan allows for spending cuts, pension savings and tax increases as requested by the creditors. Yet, the negotiations have extended into Sunday, as reports show that there is still a deadlock. Jeroen Dijsselbloem, the head of the Eurogroup, confirmed that the nine hour long meeting is still in a difficult position, as there are issues of credibility and trust. Also, the proposals failed to reflect the economic deterioration since talks collapsed and capital controls were imposed two weeks ago, according to Dijsselbloem. We patiently await the results, with rumors that some members are calling for Greece to be suspended for five years. A “no deal” will sink the euro in weeks to come.

The Week Ahead

The results from Sunday’s Eurogroup meeting will again be a major market driver for the upcoming week. Also, interesting reports like US CPI and retail sales will be released, along with UK CPI, New Zealand CPI, and many more.

Monday, July 13– Eurogroup meetings continue as the European leaders reach a decision point regarding Greece. If its latest proposal is accepted, then a great danger will be averted, as the country will be due to settle its ECB bond debt on this day.

Tuesday, July 14– Australia’s NAB business confidence was at a nine month high in June, as the latest interest rate cut and May’s Federal budget had propped up sentiment. UK CPI is also due, coming out of a temporary stint at deflation in May. We also have the German ZEW economic sentiment report. Importantly too, is the core retail sales and retail sales figures, which will give another picture of consumer spending, as the weakness in these figures has been a major concern to the central bank.

Wednesday, July 15- It’s a fundamentally packed day. Japan will be set to release its latest monetary policy statement during the BOJ press conference. From the UK, we have the average earnings index and the claimant count change. Overnight rate and the Bank of Canada statement is also due, as Fed Chair Yellen testifies. Then we have New Zealand’s CPI for the latest quarter, forecast for a lift to 0.5%. March quarter inflation figures came at -0.3%, caused by an 11% fall in petrol prices.

Thursday, July 16– The ECB conference will reflect on the latest developments around Europe, as well as the unfolding of the Quantitative easing program and the progress so far. The minimum bid rate is expected to hold at 0.05%. From the US, we have the weekly unemployment claims, forecast for a drop to 282k from 297k released in the previous week. It’s day two of Fed chair Yellen’s testimony on the semiannual monetary policy report before the senate banking committee. The Philly fed manufacturing index will also be released.

Friday, July 17– We have the Canada core CPI, as well as the US building permits, CPI, core CPI and prelim UoM consumer sentiment.

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