Greek Crisis Averted (again), Fed Stays Flexible

The seemingly inexorable rise in global equities continued this week, though US stocks took a pause, hovering just below all-time highs as the fourth-quarter earnings season draws to a close and US economic data remains pretty decent. The Shanghai Composite saw strong gains as China returned from the Lunar New Year holiday to more injections of PBoC liquidity. European equity indices surged to multi-year highs this week thanks to a glimmer of positive economic data and the upcoming launch of the ECB's quantitative easing program in March. More details on the program are expected at the ECB meeting next week. European and Greek officials kicked the can four months down the road while preliminary February German CPI inflation was +0.1%, after falling to -0.4% in January. US interest rates drifted lower led by the back end of the Treasury curve. The 10-year yield declined by more than 10 basis points on the week. A combination of mixed US economic data and Fed Chair Yellen's testimony on Capitol Hill failed to cement expectations that a June liftoff was definitely in the cards. For the week, the DJIA was about flat, the S&P500 fell 0.3% and the Nasdaq eked out a 0.2% gain.

Yellen's Congressional testimony largely reiterated the tone and content of the FOMC minutes from the January meeting. Yellen established more flexibility for rate lift off by emphasizing that changes to the forward guidance regarding the "patient" language would proceed hikes but would not necessarily indicate imminent tightening. Policy changes remain dependent on employment and inflation data, although Yellen reiterated there is no evidence inflation will move above 2% anytime soon. In a speech late in the week, Atlanta Fed Governor Dennis Lockhart framed the Fed's dilemma: it must weigh weak inflation data against good growth and continued employment gains. Fed moderate Bullard reiterated that if the Fed got too far behind the curve on rate hikes, financial markets could react violently to policy changes.

Another look at solid fourth quarter GDP and the January CPI readings underscored the Fed's dilemma: headline y/y CPI fell into negative territory for the first time since December 2009, with the -0.1% decline a big slip from the prior month's +0.8% reading. There's no mystery behind the reading, which was widely expected: depressed crude prices. The core reading, which strips out energy prices, was unchanged from the prior month at +1.6%, but was still well short of the Fed's 2.0% target. Meanwhile the second reading of fourth-quarter GDP was pretty good, declining less than expected to +2.2% from the +2.6% advance number and personal consumption slipped a bit to +4.2%. EUR/USD saw a major move lower after the US CPI data, dropping from 1.1380 to 1.1190 on Thursday, and then testing 1.1180 on Friday. Recall that the 1.1110 level seen in late January was the lowest level in the pair since 2003.

The January home sales numbers out this week indicated the housing sector continues to chug along at a modest pace. January new home sales were little changed from the six-year high seen in the December data, while median prices slipped a bit lower. January existing home sales slipped a bit lower from the December rate, but were still up 3.2% y/y. Homebuilder Toll Brothers crushed expectations in its fourth quarter report, with demand for its new homes up by double-digits y/y. The overriding concern heading into the spring selling season remains low inventories nationwide.

Greece and its European partners reached a deal to extend the current bailout plan for an additional four months, helping Athens cover bond payments due over the next several months. After weeks of pressure, the new Greek government agreed to certain vague "concessions" (pension liberalization, better tax collection, a promise not to roll back completed privatizations) in order to obtain the extension, although press reports suggested that the euro zone is skeptical that the Greeks will follow through on them. However weak, the concessions are seen in Greece as a retreat by Syriza from its election pledges to write off a big chunk of Greece's sovereign debt and end austerity. With close to €20 billion in deposit outflows from its banks, Greece remains in a precarious position, and negotiations will begin again for a more lasting solution to the nation's problems.

Brent and WTI crude futures diverged this week. After bouncing higher the first half of February, WTI weakened. The Baker Hughes weekly US total rig count continues to drop, though the steep rate of decline has eased in the last two weeks. The API and EIA weekly inventory reports featured more big builds in crude stocks, while the continuing refinery strike depressed demand, even as gasoline stocks have seen drawdowns. Meanwhile Brent sustained the gains seen earlier in the month as the moderately positive euro zone data and supply disruptions in Libya helped propel the contract back above $61.

The December quarter earnings season wrapped up with retail reports. Home Depot disclosed a very strong fourth-quarter report, with earnings and revenue above expectations and solid comps. Both The Gap and TJX met expectations, hiked dividends and topped up share buyback programs, although Gap's FY guidance was not great. Target's fourth-quarter numbers were satisfactory but its first-quarter guidance was a bit soft. Macy's met all expectations and offered flattish guidance.

On the M&A front, Valeant Pharmaceuticals nabbed a hot biotech name, helping it recover from the loss of Allergan. On Sunday Valeant reached a deal to acquire gastrointestinal drug firm Salix Pharmaceuticals in an all-cash deal valued at about $10 billion. The companies said the deal had an enterprise value of $14.5 billion, which would include Salix's debt and any cash on hand. Valeant will pay around $158/share.

China returned from a week-long holiday break to a surprise rebound in the February HSBC flash manufacturing PMI reading. The report popped back into expansion territory after two months in contraction, although the report featured a contraction in export orders for the first time since April of last year. The PBoC approved an additional 0.5% of RRR rate cuts for several urban banks that was estimated to release up to CNY100B of liquidity into the system. The central bank also injected another CNY38B through its regular open market operations via 14-day reverse repos. The Shanghai Composite rallied 2.5% on the week.

On balance, the February Japan economic data signaled that policymakers' cheerleading of the economy has yielded little progress. The jobless rate rose to a four-month high after falling to 17-year lows last month despite reports of tightening labor conditions ahead of spring wage talks. Household spending fell for the 10th straight month, while the drop in retail sales was worse than expected. CPI figures - the most closely monitored metric for its potential implication on BOJ policy - were similarly unimpressive. Nationwide, core CPI hit a 10-month low of 2.2%, and stripping away the tax increase impact core CPI fell to just 0.2% from 0.5% in December. There were press reports about an emerging rift between Prime Minister Abe and BOJ Governor Kuroda, and there is talk Kuroda is also uneasy about the government's plan to raise the sales tax in 2017.