Yellen expected to emphasize on a 'neutral' Fed

Outlook:

The calendar is stuffed with top-tier data this week, In the US, we get existing, new and pending home sales, with prices coming from Case Shiller and FHFA. We get durables, the CPI and the second revision to GDP. Germany and the UK also publish revisions to GDP. The EC releases the composite sentiment survey. Japan releases CPI, IPI, unemployment, retail sales and household spending.

But again this week, markets are focussed on Greece and on the Fed. Fed chief Yellen testifies to Congress on Tuesday and Wednesday. She is expected to emphasize the Fed is neutral until it gets more data. Wall Street in Advance analyst calls it the "New neutral.” The U of Chicago holds a monetary policy forum this week that features Bernanke, Fischer, Miskkin and others.

About Greece—the 4-month extension changes nothing and changes everything. It’s kicking the can down the road, again, with no substantive change in conditions. But it’s a defeat for the Greeks, who promised voters to repudiate the existing deal and get a new one. At home in Athens, it looks like the Greeks are renewing agreement to the very contract they promised to get rid of.

Moreover, the new reforms are a bit like rearranging the deck chairs on the Titanic. As Germany has made crystal clear, any adjustment in reform plans must be accompanied by specific funding changes. Add one penny to pensions and one penny has to come out of somewhere else. Greece may be able to tell the folks at home that the original conditions were imposed by the coldhearted northern tier and the new conditions were designed in Athens, but they are still conditions imposed by lenders in the end. Re-naming the troika the “institutions” doesn’t change the fact that lenders get to impose conditions on borrowers.

The mainstream financial press is ganging up on the loser. The Economist, writing before the events of Friday, says the Greeks blew their chance and squandered the opportunity to improve their lot—and that of the eurozone. Never one to miss a chance to kick someone when he’s already down, the WSJ says Tsipras faces more humble pie. As the FT puts it, “…the outcome will inevitably look closer to that demanded by those creditors — the eurogroup of finance ministers, the ECB and the International Monetary Fund — than those of Greece.

“Syriza has wasted goodwill and political capital during these talks. Given the reported exit of deposits from Greek banks over the past few weeks, it has also weakened its financial system and hence its resilience to future discord. What is apparently state-of-the-art game theory looks to an untutored eye like needlessly eroding trust and alienating potential allies. “Describing the debt of its fellow troubled country Italy as unsustainable and trying to score political points with the European Commission’s attempts to broker a compromise has endeared the Syriza government to no one. Germany also made a serious public relations blunder, unnecessarily rejecting a re-vised Greek offer out of hand last Thursday before reversing and coming to agreement the next day.”

We wonder if all this Schadenfreude doesn’t spell more trouble ahead. You don’t beat the horse after you have broken it to the bit and bridle. Blaming Tsipras and Varoufakis for being inexperienced and brash, and alienating everyone, doesn’t advance anyone’s cause and has the huge disadvantage of taking off the table that the bailout was badly designed in the first place and without proper regard for the welfare of Greek citizens. Having said that, the winner is now in a position to be magnanimous and we expect somewhat better financial terms for Greece, probably in the form of a reduced basic balance requirement.

Or not. The possibility of failure, i.e., Grexit, has not gone away. The euro will be buffeted by negotiating winds for weeks (or months) to come. As a note on how the FX market works, consider that the IFO data today includes a 4-month rise and IFI’s Sinn himself says the Germany economy is “robust.” But the market chose to sell euros on even this good news on the excuse that the index, while higher, was not as high as forecast. While it’s true that data is always considered in the context of the forecast—think of US payrolls—for the euro to drop 50 points on the news release is silly.

The drop reveals the underlying bias. Traders seek to break downside targets like Friday’s 1.1278. If they fail, they will buy on that “dip.” Then we have to watch for whatever upside limit may be appropriate. We can name 1.1359, the linear regression as of 8 am ET on the hourly chart. Nobody actually trades to the linear regression but it’s surprising how often a move peters out at or near the level. The point is that trying to capture “sentiment” under these conditions is interesting but not very useful for trading purposes. It’s more useful to try to get in sync with what the big institutional traders are doing by way of short-term positioning. Right now they are treating the euro like a football. Any forecast is likely to get hit, whether to the upside or the downside. It’s a Wild West for trading. Smart retail traders will stay out.