Monday, June 20, 2011
With the U.S. economic calendar on the thin side on Monday, the market’s focus will remain on the still unresolved Greece question. European finance ministers meeting over the weekend failed to release the next tranche of the original loan to the beleaguered nation and pushed a decision on another bailout to next month.
The Greek government has been shaken by widespread public disenchantment with further austerity measures. And the Europeans appear to be holding out for a show of Greek resolve to implement painful cuts before committing to a fresh multi-year rescue fund. The Greek prime minister plans to get a vote of confidence from parliament on Tuesday after last week’s cabinet reshuffle.
With the Germans now pulling back from their initial plan for ‘voluntary’ extensions to debt maturities in a so-called ‘debt reprofiling,’ all appear to be onboard with a fresh rescue plan for the Greeks. This has put the ball firmly in the Greek court. If the Greek government can hold its end of the bargain, by no means an easy task, then we should see a a fresh bailout in the coming weeks.
Greece aside, we do have a few major economic events on the docket the rest of this week. The Fed will be center stage, with the FOMC announcement and the Fed Chief’s news conference on Wednesday. In addition to Fed, we will get another look at the manufacturing sector through the Durable Goods report on Thursday after last week’s disappointing Empire State and Philly Fed manufacturing surveys.
On the Fed watch, there is hardly any suspense about interest rates, which are expected to stay at the current low levels for an ‘extended period.’ And there is little chance of another round of quantitative easing after the current round comes to an end later this month.
But while the Fed may not purchase any new bonds, it is of abiding interest to the markets of what it will do with the bonds already on its balance sheet. Of particular interest is what the Fed will do with bonds that are maturing. The overall tone of monetary policy will remain accomodative if the Fed will continue to reinvest the bond proceeds, as this will keep the size of the Fed balance sheet intact.
We will also get the Fed’s quarterly forecast for the economy along with the FOMC statement. It will be interesting to see whether the Fed’s outlook for the current quarter has come down as it has for the rest of the Street.
Beyond Greece and the Fed this week, stocks will continue to reflect the sub-par domestic growth prospects. A clear trend shift in the market is unlikely to emerge till evidence of a second half recovery takes hold. My assessment is that we will have to wait till early next month at the earliest for a chance to have such evidence.
Sheraz Mian
Director of Research
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