Waiting for Greece

illustration: euro coins

(29.06.2011) Greek debt turmoil is still the major topic, but markets seemed more optimistic yesterday.

By Kyrre Aamdal, Senior Economist at DNB Markets

Since yesterday morning there have been few substantial news about the Greek debt situation, but the actual time for the vote over the austerity measures is approaching. And the pressure from EU is increasing. Spokespeople from the union has said that there is no plan B and that Greece will default if the austerity measures aren’t approved.

At the same time there are riots in the streets in Greece. Thousands of trade unionist yesterday gathered outside the parliament, demanding that the package be withdrawn. Furthermore there was yet another general strike among public sector workers. Still, it seems like the market is turning increasingly optimistic about a solution on the Greek debt troubles and the US stock markets rose by about 1¼ per cent yesterday. The development may also be a consequence of Q2 coming to an end and that many funds as a result need to cover their risks or brush up their portfolio before the earnings season.

In Japan stock markets have continued up today and the Nikkei index is up by 1.2 per cent. The Japanese market got an extra boost from the goods productions figures for May. The figures which were released this morning showed that production rose by 5.7 from April to May. This is the strongest monthly growth rate in nearly sixty years. Expectations had, however, also been high beforehand and manufacturing companies also expect growth to have been high in June.
 
In the currency market EURUSD fluctuates according to what new comes out regarding Greece. But currently the exchange rate is about half a per cent higher than yesterday morning. The euro also yesterday got a boost from comments from ECBs Trichet who yesterday said that the inflation development caused for strong vigilance, a indicating that the ECB intends to hike the interest rate at its next policy meeting, in July.

The Norwegian krone
has been relatively stable versus the euro.

The Swedish krona
has on the other hand weakened by about 0.6 per cent versus the common European currency. The decline may partly be due to disappointing retail sales figures. New figures show that retail sales fell by 2.3 per cent from April to May. Consensus had expected a slight increase. The figures more than erased the gains made in April and the underlying trend is now negative. The retail sales figures do however not always reflect the private consumption figures seen in the national accounts. But retail sales are clearly weak relative to the strong growth seen in the rest of the Swedish economy. This may be a sign that Swedish growth is about to abate. The Riksbank has indicated three more rate hikes before year end. We do not believe in more that two and yesterday's figures strengthens this view.
 
In the US the conference board consumer confidence index fell by 3.2 points, to 58.5. This index was in February at 72, so there has been a pretty sharp drop over the last few months. The decline in June was larger than expected. According to case- Shillers 20 city index (CS20), house prices fell by another 0.1 per cent from March to April. This was slightly less than expected. On the other hand the decline in March was somewhat larger than previously reported.  House prices have now declined 10 consecutive months, and the CS20 index is around the bottom seen in May 2009.
 
Yesterday Norges Bank made it clear that the interest rate will be hiked in August. The interest rate path released last week indicated a 16 bps rise in August and a 9 bps rise in September. The interpretation was thus a 60-70 per cent probability of a hike in August. The figures were however not correct and Norges Bank has as a result made some changes to the interest rate path. The new path indicates that the interest rate will be hiked in August. It was Nordea who called attention to the new figures and it was not before the media focused on this, that Norges Bank announced the changes it had made. We understand that mistakes can be made, but we do not see why the central bank did not immediately inform the market about the corrections it had made.