Focus remains on Greece, Euroarea HICP expected to see a 0.2% yoy decline

Market Movers

• Focus still on Greece. Opinion polls released ahead of the referendum on Sunday are at the centre of attention together with the ongoing battle between the ‘yes’ and ‘no’ camp. Greece has already stated that it will miss the IMF payment today, which effectively closes its access to further IMF funding until the arrear is cleared.

• In terms of data, we will get euro-area HICP inflation, which has risen for four months in a row but should decline in June. Consensus is for a decline to 0.2% y/y from 0.3% y/y in May but the German flash HICP declined 0.6pp implying the expectations have likely been lowered. We stick to our forecast of a decline to 0.2% y/y but revise our core inflation forecast down to 0.7% y/y from 0.9% y/y in May. Markets will likely pay most attention to core inflation after the jump in May and as the ECB focuses on trends in inflation.

• We will also receive the US Conference Board measure of consumer confidence. We expect a significant increase to 97.5 but this will still leave the survey at a lower level than in the first few months of the year, when consumer confidence was boosted by the rapid decline in gasoline prices.

• A light Scandi calendar today. For more on Scandi markets see page 2.

Selected Market News

The initial risk-off reaction to the Greek situation late Sunday/early Monday largely evaporated during the day and both fixed-income and FX markets saw initial moves fully or partly reversed towards the close. Peripheral spreads to Germany actually tightened, German Bunds ended the day slightly lower (yields up a few bp). While EUR/SEK remains lower, EUR/USD is in the 1.12 area and thus back around Friday’s close, EUR/NOK is actually higher now (oil prices lower) and EUR/CHF has also fought back. In fact, the most significant reaction by the end of Monday was in European equity markets that ended the day roughly 3-5% lower. The US session also ended in red but Asia opened with gains this morning albeit Chinese indices remain challenged. US Treasury yields rose on the day, not least in the long end with the 30Y up some 15bp and the curve steepened as markets are pushing back the first Fed hike.

The relatively swift change in sentiment yesterday may derive from a range of factors. First, the market may be putting a decent probability on a ‘yes’ vote at the Greek referendum. In this respect, it will be key to watch the first polls that will likely hit the wires soon. Second, the market may have a strong confidence in the current back-stop facilities and/or that the ECB will step up to this new challenge. Watch any messages from the institutions and not least the ECB when Greece most certainly fails on the IMF payment due today. Third, investors may no longer be that scared of the prospect of a Greek EUR exit, see Greece analysis for details.

We still think it is too early to breathe a sigh of relief over Greece and expect a renewed flight to quality in the markets leading up to the weekend referendum.