Wednesday, May 27, 2015
With not much on the data front this morning, stocks today will likely be reflecting Greece-related noise and Fed-centric worries. The major indexes appear on track to start today’s session in the green after the big Tuesday sell-off which followed many days of strong gains that pushed stocks into all-time record territory.
The Greece story simply refuses to go away… the country has a big payment due to the IMF next week (June 5th) and it is believed to be out of cash to make the payment unless it closes the deal with Germany and the rest of its creditors before then. You are not wrong if you think that we have been here before – Greece has reached this critical phase a few times in the past as well. But serious Greece watchers believe that this time may be for real. If the country isn’t able to finalize a deal with its creditors in the next few days, then Greece may have no other alternative than to default.
Though Greece’s circumstances appear dire, market participants aren’t losing any sleep over them. The Fed question, however, has become a primary preoccupation. The central bank has been preparing us for the start of its tightening policy. And had it not been for the economy’s weak showing in Q1, we would be looking forward to the first rate hike at next month’s FOMC meeting. September is the next most likely date, but we probably need to see the economy start ‘behaving’ before markets zero-in on that timeline with a lot more certainty.
The question that isn’t clear at this stage is whether the Fed needs to see is whether they need a 3%-plus GDP economy for its first rate hike or it will be fine with a moderate growth trajectory of 2-handle growth pace. If it’s the latter, then September is the most likely timeline. But whatever the timeline, the start of the tightening cycle will be an eventful milestone for this market.
Sheraz Mian
Director of Research
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