Greece reforms: Tiresome brinkmanship eroding trust in both sides

Outlook:

Today’s data is March durables, always a source of anxiety because it comes in several stripes. The “best” component is orders less transportation and less military, but you usually have to dig pretty hard to find it—people like headline numbers. The same thing hap-pened to new home sales—under forecast and down on the month, but following a multi-year high and darn good on the year-over-year basis. Certainly not a reason to see the US economy going down the tubes.

Next week there is a ton of new issues by the Treasury, which the fixed income gang thinks will be tricky, plus the Fed policy meeting (April 28-29). This one doesn’t have a press conference but it will have a statement and you never know—there could be a hint in there. Alas, it could be dovish. We also get advance Q1 GDP next week and personal income and spending, as well as the employment cost in-dex.

What we have to think about over the weekend: the strong dollar is being blamed for some lousy earn-ings reports and it does appear that the Fed is putting more weight on the dollar as a factor in inflation and growth, but the consensus is that the dollar may delay but not halt the Fed’s march to normalization. In other words, not June, but September and if not September, then December. The tightening bias is a done deal and will result in higher rates someday. We think a bigger issue is how the Fed intends to manage rates and rate expectations. Even if you understand the repo and reverse repo market, a change in policy tools is disruptive. We got used to the Fed funds rate and hints about timing, and now we will get less guidance on timing—if any guidance at all--and a confusing methodology.

As for Greece, both sides are wrong about at least some things, and the tiresome brinkmanship is erod-ing trust in both sides, not that Greece had much to begin with. There is a lot of talk, some of it quite interesting, about default without Grexit, or no default but capital controls, and so on. We have to live with it for another month, probably, and all the while fear is growing that some institution will fail with vast, horrible unforeseen contagion effects, like Bear Stearns and Lehman. The FT’s Tett outlines those fears today.

But we have to face it—Greece is not harming the euro. The euro rises on decent data and sur-vives not-so-good data, while the dollar needs a constant supply of good data and any minor nega-tive-seeming data is exaggerated (new home sales). In other words, the general bias of sentiment as usu-al. Specific moves are being driven by positioning rather than interpretation of data, news and events. And nobody can read traders’ minds. We think the euro “should” not reach 1.10, but we put the word “should” in quotes because it is a value judgment and traders love to thumb their noses at those. It’s hard to buy dollars until the field clears a little.