Greece Turmoil Hit Markets

The turmoil surrounding Greek debt problems and weak data set from the U.S. contributed to lower Eur

(16.06.2011) The turmoil surrounding Greek debt problems and weak data set from the U.S. contributed to lower Euro, declining U.S. stocks and lower long term Treasury yields.

By Kyrre Aamdal, Senior Economist at DNB Markets

Yesterday large demonstrations and protests took place outside the Greek parliament. The parliament discussed the government's proposed austerity measures. The government's austerity plan, with EUR 78bn budget cuts over five year and state-asset sales did not get support in the parliament, and even party allies turned against the government.

The Prime Minister George Papandreou will thus reshuffle the Cabinet and seek a confidence vote today. Finance Minister George Papaconstantinou, who shepherded Greece's EUR 110bn bailout last year, is now under attach and will likely be replaced. Lucas Papademos is touted as a substitute. He is a former ECB vice president and adviser to the prime minister.

The political turmoil sent yields on Greek sovereign debt further up. The yield on two-year Greek notes exceeded 28 per cent for the first time and rates on 10-year bonds increased 35 bp. to 17.7 per cent. But also other markets were affected. The Euro fell 1.6 per cent versus the U.S. dollar from yesterday morning, and U.S. stocks slide the most in more then two weeks. Long-term Treasury yields fell substantially. The NOK was down 0.8 per cent versus the Euro, on increased volatility and falling oil prices.
 
The U.S. posted another weak round of data yesterday. The Empire State manufacturing index slumped to -7.8 in June, from 11.9, illustrating the extent of the economic slowdown. The detail of the survey was just as disconcerting as the headline, with the new orders, shipments and employment indices all deteriorating sharply.

The 0.3 per cent m/m increase in US core consumer prices in May was the biggest monthly gain in five years and illustrates why the Fed is unlikely to actuate another round of quantitative easing in response to the recent signs of slower economic growth. The annual rate of core inflation at 1.5 per cent is still below the Fed's implicit 2 per cent target.

The Beige Book also reported that used cars were in short supply and that prices on cars and parts had increased. These supply problems are mostly due to the Japan-related disruptions to production. Those disruptions are now beginning to ease and we wouldn't be surprised to see prices fall back in the third quarter, as vehicle inventory starts to swell again. The bigger monthly rise in core prices is a concern but a lot of it was probably due to temporary factors that could be reversed in the next few months.

The 0.1 per cent m/m increase in US industrial production in May was better than expected. Production was held back by a 2.8 per cent m/m dip in utilities output, as the unseasonably cool weather meant that fewer people needed the air conditioning on. Manufacturing output increased by a solid 0.4 per cent m/m. Production of motor vehicles and parts fell in May as well as in April but we should now see motor vehicle output rebounding from June onwards.
 
The 0.2 per cent monthly rise in April’s euro-zone industrial production was broadly in line with expectations, following unchanged production in March. The recent slowdown may partly reflect disruption to global supply chains caused by the Japanese earthquake, perhaps suggesting that growth could bounce back in the months ahead. But note that pretty robust rises in production will be needed in May and June for growth to match Q1’s 1.1 per cent quarterly gain this quarter.  But declining business sentiment and the strong euro indicate that some underlying slowdown is also probably taking place. With tighter fiscal and monetary policy likely to ensure that domestic demand expands modestly at best over the coming quarters, the recovery in the wider economy may soon be over.
 
In Norway the news has to a large intent turned on floods and rainy weather. The positive side has been increasing water reservoirs. From reservoir levels at all-time lows in March and early April, the levels are now more than fifty per cent of full capacity and above the 15-years median level. Spot electricity prices are declining and this will contribute to further declines in the over all inflation rate.