• Greece fights against a temporary Grexit plan Eurozone leaders have talked through the night over the Greek crisis, and we still await a final outcome. Only few details of what seems to be a compromise proposal are available, which show two points Greece is resisting. Greece is against the involvement of the IMF in the post 2016 rescue package, even though it is the only institution that recognizes the need of a debt relief. This is probably politically necessary for the Greek PM Tsipras to gain the approval of the reforms by the parliament. The second point Greece resists is the creditors’ demand for transfer of EUR 50bn in valuable state owned assets to an external fund for eventual privatisation to pay down the debt.
• The Greek drama seems to be a matter of trust, as the country’s creditors demand even more hard reforms than before as they don’t trust the Greek government. Greece has to pass key reforms by 15 July in order to rebuild trust, followed by further contentious reforms by 20 July as a precondition for negotiations. Last Thursday, Greece asked for a new three year bailout program of EUR 53.5bn. But in their assessment for Eurozone finance minister, the European Commission, ECB and IMF put the financing needs of Greece up to EUR 82-86 bn, largely because they need to recapitalize Greek banks in the wake of the economic damage and the capital flight in the recent months. However, even if the Eurozone leaders agree on an interim agreement, negotiating a new bailout will be difficult as some national parliaments could still oppose the plan. Finland is almost certain to reject another bailout for Greece, but most importantly, the agreement could be even rejected by the Greek parliament.
• As for the rest of the week, the spotlight will be on Fed Chair Janet Yellen’s twice-a-year report on monetary policy to Congress (the House of Representatives on Wednesday and the Senate on Thursday). We will be looking to see if there are any comments to indicate that the Fed is still on track to raise rates. The minutes of the June FOMC meeting revealed that the Fed was still on track to begin raising interest rates later this year, most likely in September, but more recent international developments in Greece, China, Puerto Rico and even the US labor report for June could mean that it would be wrong to read too much into what officials were thinking in June. Market participants will put a lot more weight on what Yellen has to say now, particularly depending on what happens with “Grexit”.
• On Tuesday, we get the UK CPI for June. In May, the country just barely exited deflation as the headline CPI rate rose to +0.1% yoy. It had been -0.1% yoy in April, the country’s one month in deflation. The figure was in line with market consensus and in line with BoE expectations of a short-lived dip into deflation. Nevertheless, the core rate missed expectations, which suggests that the low inflation is not merely a matter of low oil prices, and prices may not rise even when the effects of low oil prices fade from the data. Therefore, the focus will be again on the core figure and on any signs of positive upside momentum in prices. In Germany, the ZEW survey for July is coming out. The forecast is for another decline in the indices in July, which could add to the evidence that the German economy is losing momentum. However, the impact on the currency was minimal the last few times as the market focus was on the political developments around Greece rather on the economic data. Assuming that Greek crisis ends with a successful agreement, I would expect the market to start paying attention to the economic data again.
• Wednesday is a big day for central banks: In addition to Fed Chair Yellen, we have two central bank meetings Wednesday: Bank of Japan and Bank of Canada. Market expectations are for no change in BoJ policy at this meeting and the focus will most likely be on Governor Haruhiko Kuroda press conference afterwards. After the recent Greek drama, JPY strengthened across the board as it’s considered a safe-haven currency. A default by Greece would probably cause it to appreciate it even more. The BoJ could boost its monetary stimulus to address any surge in JPY in the event of a Grexit. What’s more, Bank officials will know the results of this year’s wage negotiations and the MPC members will update their forecasts again. In case they lower further their forecasts and push back their expectations of reaching the 2% inflation target, this also could cause the Bank to increase its stimulus program. As for the Bank of Canada, the forecast is for the Bank to cut rates by 25 bps. Coming on top of the lower oil prices in the last few weeks and the contraction of GDP in April, the Bank could act again to revive growth.
• On Thursday, the most important event will be the ECB policy meeting. No changes in policy are expected so the focus will be on the press conference after the meeting. Much will depend on what will happen with Greece talks. As ECB President Draghi said “this time it’s really difficult”.
• Finally on Friday, we get the headline and core US CPI rates for June. The headline figure is expected to rise after an unchanged reading in May, while the core rate is forecast to have accelerated to +1.8% yoy from +1.7% yoy. Since Fed Chair Janet Yellen speaks the days before, investors will be probably be watching for how she views the current inflation outlook and the market reaction could be limited on the news, unless we have a strong surprise. We get the June CPI data from Canada as well.