As expected, the Federal Reserve didn’t do anything when it concluded its Federal Open Market Committee (FOMC) meeting on Wednesday.
But through its “dot plot,” the Fed did signal that interest rate hikes were coming this year. Most economists see the first hike happening in September, while Goldman Sachs and Morgan Stanley notably see it happening in December.
For now, the spotlight shifts to the international stage where one country’s banking system is on the brink of failing.
Here’s your Monday Scouting Report:
Greece. As Greeks withdraw more and more of their money, Greece’s banking system has been pushed to the brink of collapse. Meanwhile, Europe’s leaders have yet to decide if they will extend bailout financing as Greece’s leaders resist demands for austerity measures like spending cuts and tax hikes. EU leaders will hold an emergency meeting on Monday in Brussels to talk things out.
Here’s Allianz’s Mohamed El-Erian on the matter: “The Greek government faces a virtually impossible choice in these negotiations. Either it relents and agrees to the demands of its increasingly restless creditors, thereby breaking its electoral promises and undermining what it has fought and stood for; or it holds out and risks seeing a series of disruptions that include the total implosion of the banking system, the rapid accumulation of payments arrears to creditors and suppliers, the imposition of capital controls to counter the accelerated flight of money out of Greece, and the issuance of government IOUs to meet pensions and other government obligations — all of which would deal another blow to an economy that is already ravaged by recession, alarming unemployment and climbing poverty; and it would render very difficult Greece’s continued membership of the Eurozone.”
What Greece means for financial markets and the global economy. While Greece is a relatively small economy in the world, uncertainty nevertheless surrounds what could happen should Greece’s banking system fail or if the country should exit the euro.
El-Erian discussed the secondary effects: “Markets have been relatively calm in the face of a growing probability of a Graccident and the Grexit that this could entail. Some market participants believe that, as has repeatedly been the case in the past, a last minute agreement will be reached to avert a Greek economic, financial, social and political disaster. Others realise that such an agreement could well elude Europe this time around but are comforted by the steps that have been taken to contain the negative spillovers.
“Minimising contagion risk does not equate to eliminating it. Given the truly unprecedented nature of all this, there are lots of unanswered questions, including vexing legal and operational ones … The implications for the global economy depend in large part on whether European leaders succeed in finding a durable solution for Greece or, alternatively if they fail to do so, are able to contain the crisis from pushing the rest of the continent into recession and financial instability.”
- Existing Home Sales (Mon): Economists estimate the pace of sales jumped 4.8% in May to an annualized rate of 5.28 million units. From Bank of America Merrill Lynch: “Pending home sales have improved impressively with mortgage purchase applications on an improving trend. We think stronger job growth and greater consumer confidence is playing a role in boosting home sales.”
- Durable Goods Orders (Tues): Economists estimate orders fell by 0.7% in May. Nondefense capital goods orders excluding aircraft are estimated to have climbed by 0.5%. From BNP Paribas: “While total orders are expected to have been weak, the bulk was driven by a sharp pullback in aircraft orders, as suggested by Boeing orders. Meanwhile ex-transportation orders are expected to have been relatively firm, in line with the improvement in manufacturing ISM data.”
- Markit US Manufacturing PMI (Tues): Economists estimate this manufacturing index improved to 54.1 in June from 54.0 in May. From UBS’s Sam Coffin: “Since the start of the year, the Markit PMI has been consistently stronger than the manufacturing ISM index and has consistently overstated the trend in manufacturing output growth. For early June, we project no change from the May level.”
- New Home Sales (Tues): Economists estimate the pace of sales climbed 1.6% in May to an annualized rate of 525,000 units. From Bank of America Merrill Lynch: “New home sales are likely to increase to 535,000 in May, consistent with the improvement in mortgage purchase applications and existing home sales. Moreover, the NAHB homebuilder index has improved, referencing a gain in current sales. Housing starts have also trended higher recently as builders respond to the increase in demand.”
- Richmond Fed Index (Tues): Economists estimate this regional manufacturing index climbed to 4 in June from 1 in May.
- GDP (Wed): Economists estimate Q1 GDP growth will be revised up to -0.2% from an earlier estimate of -0.7%. From Credit Suisse: “Upward revisions to core retail sales and solid services spending data point to higher consumption growth. Monthly construction data were also revised up. Looking ahead, our latest forecast for Q2 GDP growth is 2.8%… This will not be the final word on Q1. Benchmark revisions are due for release on July 30, seasonal factors are expected to be recalculated, which could smooth out the recurring weakness in the first quarters of recent years. Also Gross Domestic Income (GDI) has been running hotter than the more widely watched expenditure-side GDP data. There is some tendency for GDP to be revised towards GDI.”
- Initial Jobless Claims (Thurs): Economists estimate initial claims increased to 273,000 from 267,000 a week ago. “Claims have been very low, suggesting that there are fewer involuntary layoffs than the recent trend,” Nomura economists said.
- Personal Income And Spending (Thurs): Economists estimate income climbed 0.5% as spending rose by 0.7%. From BNP Paribas: “A rebound in control group retail sales and an increase in unit auto sales suggest that spending on goods was solid. Additionally, we are looking for a pickup in services spending, in line with recent income gains and low gasoline prices. Meanwhile, accelerations in the growth rates of both average hourly earnings and aggregate hours worked are expected to have supported a modest gain in personal income.”
- Markit US Services PMI (Thurs): Economists estimate this services index climbed to 56.5 in June from 56.2 in May.
- Kansas City Fed Manufacturing (Thurs): Economists estimate this regional activity index improved to -10 in June from -13 in May.
- U. Of Michigan Sentiment (Fri): Economists estimate this sentiment index was unchanged at 94.6. From Barclays: “Trends in initial jobless claims and equity markets since the end of the preliminary survey period should, on net, prove positive for sentiment. At the same time, retail gasoline prices have been about flat. Together, we expect slightly more upside for sentiment from the mid-month level.”
What’s priced into the markets? Despite what sounds like an elevated level of urgency in Greece, the financial markets have been relatively calm.
JP Morgan’s Jan Loeys aimed to explain all of this in a note to clients on Friday. Here’s Loeys (emphasis added): “We find that there are two very different views on this among investors, both using the recent calmness of markets as evidence. The first view, prevalent in Europe, is that everyone knows that Greek exit is a lose-lose situation for both sides and that the current standoff is simply a normal negotiation stance, if not a game of chicken, where somebody will swerve away from a collision at the last moment. That is, the market is calm because the risk of an accident is low. The alternative view, more prevalent outside Europe, is that everyone knows that the Greek-Europe marriage is doomed by a mutual lack of appreciation for each side’s views and needs, which will lead to a divorce, which hurts Greece badly, hurts the Euro area slightly, but has little impact on world markets, beyond a week of volatility. Hence, markets are calm either because nobody expects a Greek exit, or because it will have little impact on world economies and markets. This analyst is biased to the second interpretation. But some investors will surely be dismayed by a Greek exit and will consider changing their allocations.“
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