June 16: The Greek Drama Unfolds – Economic Highlights

While Greece continues to dominate the headlines and market sentiment, the news flow on the U.S. economic front was quite favorable this morning. I would expect today’s favorable economic news to offset the Greek worries and limit further stock market losses.

Weekly Jobless Claims fell greater than expected last week and we got some good news on the housing front as well, with Housing Starts and Permits coming in better than expected.

Greece was bailed out last year, as were Ireland and Portugal afterwards. But with money running out and access to private capital markets effectively closed, they are looking for more help. European leaders are debating the best course to address the issue, with the Germans resisting another bailout.

In the meantime, Greece is literally in turmoil, with demonstrators clogging the streets of Athens and defections from the socialist government putting question marks on its survival.

Greece is a small country and shouldn’t matter much to the global markets. But in the current globalized financial markets, a Greek default will be difficult to isolate. A large number of European banks hold Greek debt, which will need to be written down in the event of a default.

And many of these European banks serve as counter-parties to U.S. and other international banks. The rating warning to three major French banks by Moody’s on their Greek exposure on Wednesday explains the transmission mechanism for contagion fears.

The Greek worries come at a terrible time for the U.S. markets, which had been on a losing streak for the last six weeks due to growth concerns. The U.S. economy has been losing momentum lately, with consumer spending under pressure due to high fuel costs and manufacturing losing steam due to Japan-related disruptions. Wednesday’s weak Empire State survey was another sign that it may be a while before the manufacturing sector gets back in the gear. The Philly Fed survey coming out later today will give us another look at the manufacturing side.

This morning’s better-than-expected Jobless Claims and Housing Starts numbers break a long spell of negative economic reports in recent days. Jobless Claims fell a greater-than-expected 16 thousand to 414 thousand, while the four-week average remained unchanged at 424 thousand. This is the 10th week running that the jobless claims number has remained above the 400 thousand level. This week’s downturn, if sustained in the coming weeks, will be a welcome trend reversal in this key labor market report.

On the earnings front, Smithfield Foods (SFD), the largest U.S. pork producer, beat earnings expectations, but came short on the revenue side. We have Research In Motion (RIMM) reporting after the close today.