Weekly Outlook: 2015, June 21 - 28

Credit Agricole: The Greek saga continues - Greece After The Euro

"The Greek saga continues after Athens and its creditors failed to reach a deal at the Eurogroup meeting yesterday. We further learned that there won't be a grace period for Greece if it fails to repay the IMF on June 30. Last but not least, media reports suggested that the ECB has called for an emergency meeting today to discuss the Greek ELA. If confirmed this could be an indication that the persistent political impasse and the intensifying deposit flight have forced the ECB to reconsider its role as lender of last resort."

"So, should we panic? Maybe not just yet. For one it seems that the effort to reach a deal continues with an EU leaders' summit expected on Monday. In addition, yesterday we saw the first mass anti-government protests in Athens suggesting that the creditors' strategy may be paying off. We further suspect that a potential statement today by the Governing Council that it will make any future ELA contingent on a reform deal could add to the pressure on the Tsipras government both internally and externally. All that should, hopefully, get us closer to a resolution. That said, we are conscious of the fact that markets in Europe could start panicking if the deadlock persist into next week and the June 30 deadline draws near."

EUR seems to be holding firm for two reasons. One is the expectations that we could squeeze higher on the back of a successful outcome. The second reason is market positioning. Indeed, foreign investors unwinding long positions in EZ stocks and bonds also pare back short-EUR hedges, propping up the single currency.

"All that said, we suspect that EUR should come under sustained downside pressure if we get no resolution by Monday and fears of Greek default and capital controls escalate next week. It still remains to be seen whether the Greek tragedy would remain a EURcentric development or trigger global risk aversion."


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US Existing Home Sales, Jerome Powell’s speech, US Durable Goods Orders, German Ifo Business Climate, US Final GDP, US Unemployment Claims are the highlights of this week. Here is an outlook on the main market movers coming our way.

Last week U.S. Federal Reserve two-day policy meeting concluded with a decision to maintain current monetary policy. However, Fed Chair Yellen stated the Federal Reserve may increase rates by as much as 2% until the end of next year, with gradual hikes in between, if “more decisive evidence” arrives from the US labor market. At the same time, the Fed lowered their projections of growth this year, to a range between 1.8% and 2.0%, from the 2.3% to 2.7% rise they predicted in March. Will we see stronger US data in the coming months?

1. US Existing Home Sales: Monday, 14:00. The number of previously owned home sales declined to 5.04 million annualized rate in April, following strong reading of 5.21 million in March. Analysts expected home sales to reach 5.23 million. Prices jumped since the start of 2014 and the housing inventory contracted at same time last year. However, economists estimate the housing market will continue its progress in the coming months due to higher wages and low mortgage rates. Existing home sales are expected to reach 5.29 million this time.
2. Jerome Powell speaks: Tuesday, 12:00. Federal Reserve Governor Jerome Powel will speak in Washington DC and talk about the recent monetary policy meeting and its decisions. Market volatility is expected.
3. US Durable Goods Orders: Tuesday, 12:30. The capital goods rebounded in April despite the sharp decline in aircraft-related orders. Excluding transportation core orders edged up 0.5% following a 0.6 gain in the previous month, indicating growth in business investment. A sharp decline of 3.6% in civilian aircraft orders caused the negative reading of -0.5%. Analysts expected a slightly better reading of -0.4%. However, other sectors showed a positive increase. Durable goods orders are expected to reach -0.5% while core orders are forecasted to rise 0.6%.
4. Eurozone German Ifo Business Climate: Wednesday, 8:00. German Ifo business confidence fell for the first time in seven months in May, to 108.5 compared following 108.6 in April. However, the reading was better than the 108.3 forecasted by analysts. The drop in sentiment was due to uncertainty over Greece’s place in the euro-area and the negative effect of a Greek default on the 19-nation currency bloc. German business sentiment is expected to reach 108.2.
5. US Final GDP: Wednesday, 12:30. U.S. GDP growth expanded by 2.2% annual rate in the fourth quarter of 2014, unrevised from the February forecast. Business investment declined but strong domestic demand balanced the slowdown. Corporate profits fell 1.6% while increasing 4.7% in the third quarter. Furthermore, imports outweighed exports, resulting in a trade deficit that slowed GDP growth. Economists forecasted 2.4% growth in the fourth quarter. GDP in the first quarter is expected to contract 0.2%.
6. US Unemployment Claims: Thursday, 12:30. The number of Americans filing initial claims for unemployment benefits fell by 12,000 claims last week to a seasonally adjusted 267,000. The reading was well below forecasts, pushing the four-week moving average down by 2,000 to 276,750. Continuing jobless claims fell by 50,000 to a seasonally adjusted 2.22 million, indicating US labor market continues to improve. The number of jobless claims is expected to reach 271,000 this week.

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US Dollar Ready to Turn to Haven or Feed on FOMC Rate View
While there may be a lot of volatility for the Dollar moving forward, the medium-term fundamentals carry a positive slant whether general market conditions improve or deteriorate.

Japanese Yen Unlikely to Break Out Until Greece Moves
The Japanese Yen finished the week modestly higher versus the recently-downtrodden US Dollar, but the lack of a clear breakthrough from a highly-anticipated US Federal Reserve meeting and a lackluster Bank of Japan decision give few clues on next steps for the USD/JPY.

GBP/USD Rally to Accelerate on Tighten Race Between BoE & FOMC
The near-term advance in GBP/USD may gather pace in the days ahead should the fundamental developments coming out of the world’s largest economy fuel bets for a further delay in the Fed’s normalization cycle.

AUD Australian Dollar to Track Risk Trends with US Data, Greece in Focus
A quiet economic calendar on the domestic front in the week ahead is likely to see the Australian Dollar looking to external catalysts for direction cues. Continued speculation about the direction of Fed monetary policy following last week’s FOMC meeting and on-going Greek funding negotiations are likely to be in the spotlight.

Gold Pops as Dollar Flops- Breakout Eyes 1205 Resistance Ahead of PCE
Gold prices are higher for a second consecutive week with the precious metal up 1.85% to trade at $1203 ahead of the New York close on Friday. The advance comes amid sharp declines in the greenback with the Dow Jones FXCM U.S. Dollar Index (Ticker: USDOLLAR) down 0.71% on the week following the FOMC’s June 17 interest rate decision.





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Existing home sales likely rose a solid 4.4% to 5.26 million units in May. May existing (previously-owned) home sales are expected to post a solid 4.4% gain to 5.26 million units, more than reversing the April dip. Pending sales of existing homes, a leading indicator, have seen a steep upward trajectory since January and touched a post-recession high in April. In addition to steady growth in mortgage purchase applications in March and April, the momentum in pending sales points to a strong comeback in May closings, which remain below their 2013 peak of 5.31 million units.

Durable goods orders likely slipped 0.2% in May while ex-transportation orders likely rose 0.6%. We expect durable goods orders to fall 0.2% while ex-transportation orders likely bounced back with a 0.6% increase. Non-defense aircraft orders likely weighed in May as Boeing reported only 11 new aircraft orders, down from 37 in April. For motor vehicles and parts orders, we look for another increase given the solid 1.7% increase in auto production. Outside of transportation, orders are expected to rebound with a 0.6% rise led by rebounds in computers, electronics and electrical equipment. Core capital goods (nondefense excluding aircraft) orders and shipments will be closely watched as the series factor in to our business capex outlook. We look for a rebound in core capital goods orders to support a bounce back in Q2 business equipment spending.

May new home sales are expected to rise 1.1% to a 523K unit annual rate. New home sales likely saw continued growth in May, rising 1.1% to 523K units. Sales in April jumped 6.8% led by a surge in the Midwest. We look for sales to increase on balance in May, albeit at a softer pace as the Midwest region likely retracted a touch. Mortgages rates for 30-year fixed rate contracts edged modestly higher in May but remained below 4%. Low mortgage rates on top of solid job growth continue to be supportive of solid sales growth this year. However, sluggish inventory growth and strict lending standards remain impediments. In this respect, a strong May increase in the supply of homes for sale would be encouraging for the outlook.

In its third and final release, Q1 GDP growth likely saw an upward revision to -0.1% from -0.7%. We look for an upward revision to Q1 real GDP growth (-0.1% vs. -0.7%), reflecting revisions to March trade data that imply less of a decline in net exports. The quarterly services survey came in higher than BEA assumptions, notably for spending on physician services, and March core retail sales were revised higher. Inventories also saw upwards revisions.

The May headline PCE price index likely rose 0.4% on the month with the core index rising 0.1%. As a result, annual PCE inflation likely firmed to 0.2% YoY while core inflation was stable at 1.2% YoY. The May headline PCE price index likely rose 0.4% on the month while the core index is expected to rise 0.1%. Both match the monthly increases in the May CPI. In the May CPI report, energy prices boosted consumer prices with the gasoline index rising 10%, while food prices remained weak with a flat print. Excluding food and energy, we look for core PCE to firm to a 0.1% increase following a flat reading in April. Largely contributing to the April weakness was a dip in nondurable goods prices and soft healthcare prices. We expect firmer readings in both components given a stabilization in nonpetroleum imported goods prices as well as price growth on the producer level. Our projections point to a 0.2% YoY rise in annual headline PCE inflation, up from +0.1% YoY in May, while core PCE inflation was likely stable at +1.2% YoY. Looking ahead, we expect core PCE inflation to bottom out at +1.2% YoY in Q2 and slowly accelerate towards the FOMC 2% target this year through 2017. Given the unchanged Q4/Q4 2015 FOMC projection range of 1.3%-1.4% in the June Summary of Economic Projections, this is likely the Fed’s scenario as well.

Personal nominal income likely rose 0.5% in May while spending likely picked up with a 0.6% increase. May nominal income likely rose 0.5%, slightly firmer than the 0.4% increase in April. Earnings and hours posted strong gains in May, with average hourly earnings and the aggregate workweek both rising 0.3%. Nominal personal consumption expenditures likely picked up with a 0.6% increase in line with the strong May retail sales report. Vehicle sales surged over 7% to a 17.8 million unit rate, suggesting a big boost to durable goods spending, while the 1% increase in exauto retail sales points to a meaningful rebound for nondurable goods. Spending on services likely matched its April increase, rising 0.2%, as we expect energy services to weigh given the 1% drop in May electricity and natural gas prices. Altogether, our 0.6% projected rise in May nominal PCE supports a firm acceleration in Q2 consumer spending to a 2.8% pace.

The final University of Michigan (UofM) consumer sentiment index likely confirmed a rebound in June to 94.6 from 90.7 in May. June UofM consumer sentiment likely confirmed its preliminary print of 94.6, up from 90.7 in May. A June rebound in sentiment will be most welcome as the weak May reading marked the lowest level since November 2014. Gas prices hardly moved since the preliminary survey release, standing at $2.80/gal on average at the time of writing. After a volatile few weeks, stock prices also have rebounded from their June lows. Both developments are reassuring for the consumer. As economic activity and labor markets continue to recover from the soft patch in the first quarter, we expect consumer spirits to move higher, supporting stronger household spending. Finally, short- and long-term inflation expectations will be noted, as both measures slipped to 2.7% in the preliminary report.


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"Despite a dovish market reaction to this week’s FOMC statement, the Fed’s message remains focused on data dependency, and our economists continue to believe that conditions will be met for policy tightening to start in September. Accordingly, markets should remain focused on upcoming US economic releases.

In the week ahead, a rebound in May core durable goods orders would be encouraging after a downward revision to April data, while the personal income and spending report should echo the improvement in retail sales data. We remain USD bulls but recommend positioning through option structures with limited upside potential given the Fed’s sensitivity to dollar strength.

The coming days may be the final opportunity for some sort of Greek deal to be agreed ahead of the end-June deadline. Reading EUR moves around Greek headlines remains complicated by the EUR’s funding currency status. Our preference is still to fade any rallies on a Greek ‘resolution’ as we believe it would ultimately lead to investors regaining appetite for shorting the EUR against pro-risk currencies."

the source

"USD: Increasing Sensitivity to Inflation. Neutral
We remain medium-term USD bulls, but we continue to believe USD will struggle in the near term. The FOMC meeting this week has changed the near-term outlook as a more dovish than expected Fed has made front end yield differentials less USD supportive. We believe inflation readings will have more importance with employment bouncing back but core inflation remaining low. Should inflation start materially surprising to the upside, the Fed may need to reconsider its plan for a very muted hiking pace.

EUR: Grecian Risks Remain. Bearish.
We remain bearish EUR over the medium term, but see scope for near term support. Should European equities sell off as concerns about Greece rise, European investors would need to buy back their short EUR currency hedges. That said, Greece remains a major risk and tensions are escalating, which could drive markets to increase the risk premia in the price of EUR, weighing on the currency.

JPY: A G10 Outperformer. Bullish
We believe JPY is likely to be one of the outperformers over the next few weeks, due to a few factors. First, Kuroda’s comments last week that JPY has gone too far are significant. Second, with market volatility still rising, we believe risk appetite could see some pressure, driving repatriation flows that support JPY.

GBP: Near term support. Neutral
GBPUSD is being mainly driven by rate expectations. The strong wage data this week should bring forward the first rate hike in the UK and keep GBP supported. We particularly like buying against more vulnerable crosses. While the BoE is expected to remain on hold over the coming months, the markets will start to speculate on who may be the first member of the MPC to vote for a hike, keeping the August inflation report in particular focus. We continue to monitor the incoming data.

AUD: External and Domestic Pressures. Bearish
We remain bearish on AUD as we expect risk appetite to soften amidst rising volatility and tighter liquidity, removing support for carry currencies. What’s more, the RBA suggested there is scope for further rate cuts, and specified the need for further currency depreciation going forward. With external and domestic factors both suggesting AUD should be lower, we remain bearish."

the source

EUR/USD continues to grind higher as Greece continues to dominate the headlines.

"The main focus was the June Fed meeting where early year expectations of a hike this month now feel a long time ago. There was speculation that Yellen shifted her 2015 dot lower, although as our US economist noted it is hard to tell. With the Fed still in data-dependent mode, more convincing evidence of a Q2 growth pick-up is needed. This week’s May durable goods orders and PCE are the next big data," DB argues.

"In any case, the median FOMC forecast for 2015 remained at 0.625%, while forecasts for 2016 and 2017 fell 25 basis points...Alan Ruskin looked into what current forward rates imply for EUR/USD based on the past relationship of the cross to rate spreads. A Fed funds rate of 275bp versus a zero EUR overnight rate would imply a further 20 big figure move lower in the cross. Clearly, however, the burden of EUR/USD weakness now lies on the Fed. With the Fed still in data-dependent mode, more convincing evidence of a Q2 growth pick-up is needed," DB adds.

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