US: Upcoming economic data releases to shape interest rate expectations

Greece: Next payment to IMF coming due on June 5

ECB: Unchanged monetary policy, questions on Greece

US: Upcoming economic data releases to shape interest rate expectations

Pressure on Greece is rising ahead of the next payment coming due

The negotiations between Greece and its creditors continue to drag on. The news backdrop remains unchanged: While the Greek side time and again raises the prospect that the negotiations will soon conclude, representatives of the creditors regularly stress the need for additional sizable efforts. Whether and when a breakthrough will be achieved can scarcely be foreseen. However, it should emerge relatively soon whether the Greek side is prepared to allow a late payment or even a default to occur. A tranche of EUR 240 m. payable to the IMF is coming due on Friday next week, which is unlikely to be paid without new financing according to Greek government spokesmen. Even if this payment could still be made, a further payment of EUR 270 m. will be coming due a week later. Overall, Greece has to redeem EUR 1.5 bn. in IMF loans in the course of June. Should Greece fail to make a payment due to the IMF, this would still be regarded as a late payment rather than a default for a time period of several weeks thereafter. Theoretically this would provide an additional margin of time in order to continue with negotiations or to hold a referendum on the offer tabled by creditors. The markets have shown this week that they continue to react with safe haven flows to the associated news flow. Yields on government bonds of countries with the best ratings have declined, while those of countries with weaker ratings have risen (see chart). We would regard a Greek referendum on the package of conditions demanded by creditors as positive for the markets, as more than 70% of Greece's citizens are in favor of their country remaining a member of the euro zone. By contrast, a deferral of payments and continued negotiations would worsen market sentiment, as in this case the outlook for an eventual positive outcome of the negotiations would deteriorate as well. This would likely result in a further widening of spreads within the euro zone. An early agreement would lead to a reversal of last week's moves though. However, a precondition for this would be a decisive change in at least one of the negotiating positions, which is currently not in sight. The status of the negotiations remains very unclear. German Finance Minister Schäuble said that during the last several weeks negotiations had hardly progressed. EU Comissioner Moscovici on the other hand saw three quarters of the distance already passed. While on the same day IMF Director Lagarde didn’t want to rule out a “Grexit”. The ECB is meanwhile increasing pressure on Greece as well. This week it was decided not to raise the limit for emergency liquidity assistance further. Since it has to be assumed that deposits have continued to flow out (official data will only be available in a few weeks time), the funding gap has to be bridged with reserves, which are thus melting away. If this trend were to continue, capital controls would be an inevitable consequence. Next week financial markets will focus on the payment due to the IMF on Friday. The closer the deadline draws without a deal being struck, the more nervous the capital markets are likely to become.

ECB to hold course

Any change of monetary policy at the upcoming meeting of the ECB’s monetary council meeting on Wednesday can more or less be ruled out. President Draghi is set to confirm the course of asset purchases. We expect the questions of journalists to focus on Greece. As in the past, Draghi could refer to the ongoing negotiations and not give any clear statements concerning the ECB’s intentions. Nonetheless, higher haircuts for Greek collateral for the ECB’S liquidity operations and/or a permanent freeze of the emergency liquidity facility have been options on the table for several weeks now. It seems unlikely that Draghi will use any of this heavy weaponry yet. Recent comments by the ECB’s Vice-Governor confirm this assumption. Constancio recently said that there was 'no automatic connection between a Greek government default and the banks becoming insolvent.' We conclude that, from the perspective of the ECB, banks could remain solvent in such a case, which is the precondition for access to the ECB’S emergency liquidity facility. Accordingly, we interpret this week’s unchanged limit only as a warning shot. Still, we do not want to rule out completely that Draghi could increase the pressure through any of the above-mentioned measures, should this be justified by any dismal process in the negotiations with Greece.

For the time being, US interest rate expectations are only reflected by short term maturities and the dollar

In the course of a speech she delivered on Friday of last week, Fed chair Janet Yellen gave a relatively clear indication that a first rate hike is still in the cards this year. On the same day CPI data for April were released, which came in slightly above expectations. Since then, short term yields in the US have increased significantly in concert with a rising dollar, while longer term yields have declined – probably due to the uncertainty surrounding Greece. A number of important US economic data will be released next week. On Monday the ISM index will provide insight into last month's activity in the manufacturing sector. On Wednesday the ADP employment report will be released, which will be followed by the official labor market report on Friday. While the effects of these data releases may continue to be confined to short term maturities for now, economic performance will ultimately be decisive for the level of long term yields in the US as well. We expect a steady revival in US economic growth and are forecasting an initial rate hike in September as well as rising yields on treasuries over coming months.