The Week Ahead: Greece Deal and 3 Central Bank Meetings on Tap

Another action packed week awaits as we watch and wait for Greece and the troika to sign on the dotted line, and with three central banks (RBA, BoE and ECB) on tap.

US data

The US employment report on Friday was a very interesting one - but not due to the strong headline data. Rather, the internals show a very confusing picture that require a good dose of explanation, with something for both pessimists and optimists to latch onto. Our Macro Mads will enlighten us with a breakdown of why some of the internal numbers were so confusing with this report and how we should read them. The takeaway? The jobs report was about as good as touted and this was also somewhat corroborated by the strong employment sub-index in the January non-manufacturing ISM.

Europe

In Greece - there appears to be a new agreement to cut a further 1.5% of GDP in spending amongh the key parties, but the deadline for signing off with the troika is fast approaching tomorrow at 11 a.m. local time. Will Greece agree to troika terms and more importantly, will Greece follow through on its promises - that's the key issue that has it in hot water with the troika in the first place. The voluntary PSI deal is estimated to have a haircut around 70%.

There are few auction of sovereign debt of consequence this week across the EMU countries beyond shorter term bill auctions. The ECB will be out on Thursday - more on that below in our coverage of the economic calendar this week.

Asia

China fully back on-line this week after the New Year's holidays, so all eyes will be on the next rounds of data out of China after the holiday this year was early and considered particularly disruptive to a number of activity indicators. The January non-manufacturing survey was rather weaker than expected and anecdotal evidence over the holidays suggests that the growth in holiday spending was more anaemic this year than last. China reports its latest inflation data on Thursday.

Bonds

Bond sold off on Friday, but this was a fairly tepid reaction given the strength of the US data on Friday. Still some distance to the upside before 2.00/2.10 yield level on US 10-year notes and similar in German bunds is reached. Long yields have been going nowhere for months, so we'll await signs that something is happening and until then assume that the market remains complacent on the idea that the output gap remains so large and that central banks are exerting so much control over the bond market that yields are not going higher any time soon.

Equities

As Peter Garnry points out, earnings surprises in the US are still positive after nearly half of S&P500 companies have reported, though forward earnings will still need strong economic growth. Next quarters earnings are expected to dip before recovering again in Q3.

Commodities

The confrontation with Iran is keeping Brent crude elevated at close to multi-month highs while WTI crude trades some 15 dollars or more cheaper. The US, despite strong economic data has shown some weak demand numbers in crude and petroleum, as this MISH blog post discusses. Gold has been strong lately on the QE trade, but dove on Friday and into today on the strong US economic data, as the assumption is that strong data eventually means less money printing, as the degree of QE seems to be a key determinant of the strength in precious metals markets.

FX

The market not sure what to do with Friday's US jobs report - is it risk positive and therefore USD negative as we have been so well trained to look for (USD as carry trade currency, better yields to be found elsewhere, etc.), or was the report SO positive that it throws the prospects for the Fed's QE3 sufficiently into doubt to trigger a USD rally? So far, if we look at the gold market as a confirming indicator, the market appears to be playing things more from the QE angle after the data threw some cold water on the enthusiasm for USD selling that came with the most recent, rather dovish FOMC meeting.

Week Ahead

Today

• Canada Ivey PMI - this is a volatile survey and not seasonally adjusted, but interesting nonetheless, as data out of Canada has been souring of late.

Tuesday

• RBA (tonight for those of us in Europe!) - the RBA expected to cut 25 bps to bring the rate to 4.00% after not cutting at the previous meeting. Despite expectations for this cut, the projections for RBA easing have been unwinding rapidly, with only -82 bps of cutting priced in for the year forward, according to a Credit Suisse measure. With the Aussie flying so high, it will be very sensitive to guidance from Governor Stevens.
• US Fed's Bernanke to testify before Senate - on “the economic outlook and the Federal budget situation”. This was after testimony to the House on Friday. Overall, his rhetoric was nothing surprising on Friday, the more interesting thing being how impassioned resistance to Fed policy becomes during this election year and whether it could shift Fed behaviour.

Wednesday

• Japan Dec. Current Account Balance - Japan's Merchandise Trade Balance has tipped into a deficit in recent months, but the current account balance remains in surplus, if still close to historic lows. Everyone is curious what happens to the Japanese sovereign debt market, especially in the event the current account surplus is erased, as due to the accelerating demographic aging, Japan has become a nation of net spenders rather than savers.
• Switzerland Jan. Unemployment Rate - the unemployment ticked up from 3.0% over the last couple of months. Is this the beginning of a new up-cycle in unemployment? The more pressure on the Swiss economy, the more likely that the SNB moves sooner rather than later.

Thursday

• New Zealand Q4 Unemployment Rate/Employment Change - interesting to observe as the kiwi flies to ever higher levels lately that New Zealand's unemployment rate never really declines after the global financial crisis in 2008-09. The strong currency is not helping matters.
• China Jan. Producer and Consumer Price Index - the CPI has bottomed out at just above 4.0% YoY lately, rather than continuing to fall, which may hinder the Chinese authorities from more rapid monetary easing. A bigger drop will be seen as a green light for further easing by the PBOC.
• UK Dec. Manufacturing Production - registered a slight contraction on a YoY basis for November for the first time since January, 2010.
• UK BoE announces interest rates/asset purchase target - most looking for another GBP 50 billion in asset purchases as the previous round of purchases will soon be complete, though a minority is looking for an increase of the same size as last time (GBP 75 billion). The latter wouldn't be terribly surprising though some rhetoric has suggested a slightly easing in the rampant dovishness among BoE members.
• Euro Zone ECB announces interest rates - The ECB has had swimming success with its liquidity enhancement measures introduced at the December meeting - will they simply hold the course for now and wait to see how things look after the next 3-year LTRO at the end of this month, or will Draghi keep up the easing trend with another 25 bp rate cut? The overwhelming majority favours the ECB maintaining current policy, so there is plenty of room for a surprise as the majority think that the ECB will hold the 1.00% policy rate for the duration. The odds for a cut are generally under-appreciated in our view.
• US Weekly Initial Jobless Claims - a weekly focal point

Friday

• Switzerland Jan. CPI - very negative in December (-0.7% YoY) and another factor as we all try to guess when the SNB will move next.
• Sweden Dec. Industrial Production and Orders - Orders were off a vicious -8.4% YoY in November. This is important data for Sweden's export economy, which is threatened by the Euro Zone weakness.
• UK Jan. PPI Input/Output - Still high, but falling rapidly.
• US Dec. Trade Balance - no real trend evident and still gaping!
• US Preliminary Feb. University of Michigan Confidence survey - more interest than usual here after the awful miss of the Conference Board confidence survey in January. The Michigan survey actually rose in January.