Eurogroup Meeting: All eyes on Greece as deadline approaches

Market Movers

• We expect Norges Bank to deliver a rate cut of 25bp as it signalled a 100% probability of another rate cut in the March MPR. However, we expect NB to turn to a neutral bias by presenting a new rate path signalling unchanged rates until H2 16. This would a bit more hawkish than current market pricing. There is a risk that NB will keep at least some of the easing bias, as it could be reluctant to go all in on the oil investment survey and wants to maintain at least some downside to oil investments next year. If so, the effect on the rate path would be correspondingly lower. On the other hand, we cannot totally rule out the possibility of NB staying on hold. If oil investments are about to stabilise in 2016, the need for further monetary stimuli would be eliminated.

• In the euro area the Eurogroup finance ministers meeting will get attention as all eyes are on Greece as the deadline for a deal is approaching. Yesterday EU officials said talks about Greece would be very short at today’s meeting. We do not expect a solution, as there still seems to be a later deadline at next week’s EU leaders summit.

• US CPI inflation is expected to increase 0.4% m/m as higher gasoline and food prices are supportive. Momentum in core CPI has generally also improved lately and we expect an additional uptick of 0.2% m/m.

Selected Market News

Information from the June FOMC meeting was generally more dovish than we had expected, see FOMC: The inner circle tilts to one hike this year. The dot plot showed that the median projection for the Fed funds rate end 2015 was unchanged at 0.625% but this masks a tilt towards just one rate hike for the most influential members of the FOMC. There are now seven members expecting only one hike or less this year compared to three in March. Importantly, the five expecting one hike this year are likely voting members of the FOMC and are likely to include both Yellen and Dudley. We had also expected Yellen to use more hawkish language at the press conference in order to prepare markets for an upcoming rate hike.

We still see September as the most likely meeting for lift-off but it might require stronger data than the Fed is projecting in coming months. However, we expect the unemployment rate to fall faster than the Fed does and wage inflation to pick up in the second half. We also still see two hikes this year but it will be a close call.

Markets responded with a sharp drop in yields and have not pushed the pricing of lift-off to December/January 2016. EUR/USD also pushed higher on the more dovish message from the Fed. Stocks markets got a lift but soured again overnight in Asian trading. Focus is shifting back to Greece with the Eurogroup meeting tonight. The Greek central bank yesterday warned of ‘an uncontrollable crisis’ if a Grexit was to be the outcome of failed negotiations.