Still No Solution for Greece

U.S. stocks posted their biggest gains in almost two months yesterday. The rally undermined the safe

(15.06.2011) U.S. stocks posted their biggest gains in almost two months yesterday. The rally undermined the safe-haven value of government debt and pushed yields up.

By Kyrre Aamdal, Senior Economist at DNB Markets

In the currency markets the movements in the FX rates have been generally modest since yesterday morning. One exception is the 1.4 per cent increase in EURCHF. The Norwegian krone has strengthened slightly against both the Euro and the U.S. Dollar. Versus CHF the NOK is 1.7 per cent stronger.
 
Yesterday the Euro area finance ministers failed to agree upon a second Greek rescue package without triggering a default. Germany has demanded a solution where bondholders share part of the costs of a new Greek aid package. The European Central Bank backed by France warned that the move might constitute the euro area’s first sovereign default. Also credit rating agencies have said that making bondholder's terms less favourable will be viewed as de facto default. With consensus elusive before the target date of a leaders’ summit late next week, finance ministers agreed to convene again on June 19, a day earlier than planned.  

The focus now shifts to German Chancellor Angela Merkel and French President Nicolas Sarkozy to resolve their differences at a June 17 meeting in Berlin. Yields on 10-year Greek bonds touched 17.46 per cent yesterday, a record in the 17-nation euro area’s history. The issue of EUR 1.63bn in a 26 weeks bill met however good demand, and only to a marginal higher yield than previous bills.
 
In the U.S. the retail sales fell first time in nearly one year. The 0.2 per cent decrease in May was however less than expected. Auto sales and parts contributed substantially to the decrease, and should to a large extent be subscribed to the Japanese earthquake. Deliveries of auto parts and electronics from Japan fell substantially after the disaster and inventories have been reduced and prices increased. Retail sales ex autos increased 0.3 per cent on the month, slightly above expectations. The figures are measured in value terms. Consumer prices for May are expected to increase by 0.1 per cent (figures out today). The real growth in retail sales is thus very low. Even though: the stock markets rallied at the figures.
 
In Sweden core inflation (CPIF – CPI with constant interest rate payments) fell form 1.8 per cent y/y to 1.7 per cent y/y. This was slightly below consensus forecasts and the Riksbank's expectations. Total CPI was unchanged at 3.3 per cent y/y. The figures will probably not affect the Riksbank's view on the interest rates. We expect three more rate hikes from the Riksbank during the next twelve months with the key policy rate reaching 2.50 per cent. This is one hike less than the Riksbank itself has forecasted.
 
In the UK the total CPI inflation was unchanged at 4.5 per cent y/y in May, as expected. Core inflation fell a bit. The total inflation ratio has been above the target for 18 month in a row and in 51 of the last 60 months. Bank of England has already forecasted that inflation will peak at 5 per cent, but view the high rates as temporary – caused by VAT increases, increased commodity prices and a depreciated sterling.
 
Yesterday we reported high inflation figures from China and expected further Chinese policy tightening. Short after the Public Bank of China announced increased banks' reserve requirement ratio (RRR) by 50 bps. It was the sixth increase this year. Large banks thus have a RRR art 21.5 per cent, while smaller banks have a RRR at 19.5 per cent.