The Fed was more dovish in June, but Williams kept 2 hikes in place. Creditors are waiting for the Greek reforms proposal, which has to be combined with the access to ESM program. No surprises from the Belka conference, but the zloty significantly weakened after 16.00 CET.
Macro data (CET- Central European Time). Survey is supplied by Bloomberg unless otherwise noted.
- News regarding Greece and the austerity plan which has to be presented to creditors by midnight
What are the odds for a deal?
Markets have been waiting for Athens' reform plan. It is necessary to receive aid from the ESM program. According to the Greek press, which is cited by “The Guardian”, the Hellenic Republic wants to propose to the creditors savings of 12 billion in two years.
It is around 4 billion more than in the plan which was rejected by the referendum. It is consistent with the idea that the ESM plan requests much more austerity than following the older plan. Additionally, despite the IMF view that part of the debt should be forgiven, it is not really possible to count on restructuring at the moment.
However, even if Athens sends a reform proposal which includes more savings, how can the creditors believe that the Syriza government will follow the rules? This question has to be answered by the euro area officials when they start to discuss the deal during the weekend.
It would also be hard to explain the need for more cuts on Greeks. Their referendum turned out to be useless and the government is capitulating in the eyes of society. Instead of bringing debt reduction, it is agreeing to more cuts.
The forthcoming days should be critical regarding Greece. Today, we should get some hints about what kind of reforms Athens will present. The main talks are scheduled for the weekend. If no solution is found in the coming days there will be more than a 50% chance for Greece to leave the eurozone.
Fed's “minutes” and Williams
The minutes published on Wednesday were dovish. There were no significant fears regarding the domestic economy, but rather regarding global issues. The Fed's members claim that uncertainty might be seen due to issues regarding Greece and China. Because the situation concerning the Hellenic Republic has worsened since mid June when the meeting was held.
In our opinion, too much attention was placed on China. The FOMC put some risks regarding the Chinese economy but it turned out that investors connected it with the slide on the Shanghai stock market. But equities for the Chinese have a minor impact on the economy and capital market is regarded as a quasi gambling play for wealthy individuals. It should not affect any investment or consumption decisions for the broader economy.
The only viable argument for later hikes was the case that just one Fed member expressed a will to tighten the policy in June but he or she also claimed that waiting one or two more meetings would not be a problem. It means that, if the NFP readings from July and August turn out to be weak it will push the hikes towards December.
The foreign market in a few sentences
In the coming days, we should receive a detailed reform proposition from Greece and initial comments from the creditors. They may give a broader view on the situation regarding the Hellenic Republic before the weekend meeting with the Eurogroup and the UE leaders.
The zloty regains some ground
Yesterday after the MPC conference started we observed a significant slide on the zloty. The euro topped 4.24 PLN. However, there was no major news both in the statement and conference to explain the move.
No surprises were also seen in the macroeconomic projections. Comparing the data from the March Inflation Report the GDP was revised upwards by 0.3 percentage point to 3.5% for this year and 0.1 point to 3.4% for 2016. The market probably expected the central bank’s projection to be more bullish for 2016 and match the government estimations for 3.8% GDP growth. In the end, however, the difference is not that large and should not weaken the PLN.
As a result, we should see the PLN weakness as a short term move and currently the base case scenario is 4.22 PLN per euro. If the deal with Greece can be seen viable before the weekend the EUR/PLN might fall below 4.20, but if Athens fails to satisfy creditors the Friday session might even end around 4.25.
Anticipated levels of PLN according to the EUR/USD rate
Anticipated GBP/PLN levels according to the GBP/PLN rate.