Recap 5-10-12

Main Items:

· BoE kept policy unchanged as expected

· US Initial Jobless Claims were stable at 367k vs 368k exp and 365k prev

· US Import Prices declined to 0.5% YoY vs 0.8% exp and 3.4% prev

· Greece’s PASOK party now has 3 days to try and form a government.

· Bank of Spain converted preferred shares in Bankia to ordinary shares, becoming the largest shareholder with a 45% stake

Overseas:

  • AU Employment jumped printed +15.5k in Apr vs -5k exp and 44k prev. This took the Unemployment rate down to 4.9% vs 5.3% exp, and 5.2% prev. However, Participation dropped to 65.2% vs 65.4% exp and prev
  • Japan Eco Watchers Outlook Survey improved to 50.9 in Apr vs 49.7 prev
  • Japan Current Account Balance improved to -8.6% YoY in March vs -17.1% exp and -30.7% prev
  • China Trade Balance jumped to 18.4bn in Apr vs 9.9bn exp and 5.4bn prev. Exports growth continued to outpace import growth on a YoY basis.

Upcoming Data:

  • Wed: Australia Employment
  • Thurs: China Trade Balance, Japan Eco watchers Survey, UK MPC, US Import Prices, Initial Jobless Claims, China CPI, Money Supply
  • Fri: China IP, Retail Sales, UK PPI, CanadaUnemployment, US PPI, U Michigan Confidence
  • Mon: Swiss Producer & Import Prices, RBA Minutes,
  • Tues: French CPI, German 1Q GDP, French Payrolls, German Zew, US CPI, Empire Manufacturing, Retail Sales, NAHB Housing Market Index
  • Wed: UK Claimant Count Rate, EU CPI, Swiss ZEW survey, EU Trade Balance, BoE Inflation Report

Commentary:

Goldman noted that one possible outcome for Greece is that ECB funding for Greek banks continue, even as the Troika withholds payments. This would avoid forcing an immediate Greek exit, but would force a sudden balancing of the primary fiscal budget, worth ~2.3% of GDP, and halt or delay payments in arrears worth 3.5% of GDP. The actual effect could be larger, depending on the how much cash the government has in its coffers, and seasonality of tax payments. (Historically there is a jump in EUR inflows to Greek banks in the Spring, possibly because that is when visitors book their vacations) It is conceivable that Greek companies and households withhold tax payments as it becomes increasingly likely that the government is not able to pay out 100% of its obligations. The government may then be forced to stop paying non-police civil servants for a month or more. Because all this happens in a compressed time frame, the annualized change in QoQ GDP could be -10% or more. If Greek banks can survive the resulting deposit drain, (probable, given that the ELA gives the Greek central bank a fair bit of leeway) and the Greek government survives that month, it could plausibly attempt to renegotiate austerity measures with the troika. Given the GDP drop over the interim, there will be a fairly good case for slower pace of austerity at that juncture.

Of course, there’s a chance that ND/PASOK are able to form a government. We will find out soon.

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