There were some hopeful noises coming from the various camps involved in the negotiations between Greece and its creditors last week, but once again a deal has failed to materialize.
By Peter Martin
Monday, June 15, 2015
A break-down in weekend talks has hit European stock indices hard: the German DAX is down close to 2% at 10,984, while the French CAC 40 slid 1.65% to 4820.
The euro’s decline on Monday has been more measured, slipping 0.35% to 1.1224, with some support coming from news of a surprisingly positive trade balance for April, which came in at a record surplus of €24.3 billion, around €10 billion higher than the year-ago comparison, with exports surging as imports declined.
Despite this positive sign for the eurozone economy, the overriding issue at the moment is concern over a possible Greek default, which is dragging heavily on risk appetite.
Also likely to add to caution in the market in the early part of this week will be the looming presence of the FOMC meeting, which begins on Tuesday with an announcement scheduled as usual for Wednesday afternoon. The Fed is widely expected to announce no change for this meeting, but investors will be looking closely at the statement for any changes in forward guidance, as well as the central bank’s latest economic forecasts, in the hopes of gaining some clues as to when a first rate hike might occur and, perhaps more crucially, how steep the trajectory of tightening might be following lift-off.
We can expect the Fed to use its usual language that it will assess progress, both realized and expected, taking into account a wide range of information that include ‘measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.’ While labor market conditions have been consistently healthy and we have started to see a few glimpses of inflation warming up, US economic indicators continue to look a little mixed.
Manufacturing in particular has been consistently inconsistent and the latest regional Fed survey shows some very disappointing signs for the sector in the New York region. The Empire State Manufacturing Survey sank to -1.98 for June from May’s reading of 3.09. New orders are a real worry at -2.12 in June, the third sub-zero level for this crucial component in the last four reports.
The Fed’s regional manufacturing surveys are based on anecdotal evidence, but the hard data doesn’t look any better. The Fed’s industrial production index came in at -0.2% for May, versus the consensus estimate of +0.2%, while Aprils’ level was downwardly-revised from -0.3% to -0.5%. Capacity utilization eased from 78.3% to 78.1%, while the manufacturing component of the report showed a 0.2% fall for May. Manufacturing constitutes a small but significant chunk of US economic activity and has historically shown a close correlation with GDP. The surprise drop in today’s report will therefore create some worry over how healthy economic growth is going to look in the second quarter.
The combination of the situation with Greece and the weak US industrial data has led to a weak opening on Wall Street: the Dow Jones fell 186 points or just over 1% to 17,712 in early trading, while the S&P 500 Index dropped 0.88% to 2075.8.
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