The problems in Greece were back at the forefront in NY trading. News that a German official said that the beleaguered country should go to the IMF instead of seeking aid from other Eurozone members sent shockwaves through the market. Greek stocks ended the day down more than -4% while its 10-year government bond sold off in size (yields rose 16 basis points to 6.26%). Euro has suffered predictably on the back of the news and has fallen towards 1.3610 against the US dollar after having tested above the 1.3800 zone just yesterday. Let's not forget that other peripheral Eurozone countries are likely not far behind in terms of seeking aid and this keeps the path of least resistance for the common currency decidedly lower. Also keep in mind that if Greece goes to the IMF, the United States (with nearly 17% of the vote) has the power to block any aid package. Given the political environment here in the States, giving Greece aid might not be politically palatable. How this dram plays out will continue to have significant implications for EUR in the short/medium term.
Central banks also dominated the wires today. Early morning rumors of a potential Fed discount window rate hike elicited a major short-term rally in the US dollar. The hike never panned out and it was once again an overreaction by the market. We maintain that even if the Fed decides to increase the discount window rate (again), this would not be a shift in monetary policy - as we expect the Fed funds rate to remain on hold through at least the end of the year. The SNB also got in on the action. Board member Danthine caused quite a stir by warning investors to expect market-based CHF rates. This was deemed to be a first step away from intervention (which the SNB has been heavily involved in for some time now) and caused a sharp decline in EUR/CHF. The next major area of support is now the October 2008 lows by 1.4300 for a move below would open up potential to the 1.4000 area. Speculative names were unwinding long EUR/CHF positions and we will have to see whether this continues overnight.
In terms of the economics, US data in early NY trading came in bang-on expectations. US core consumer prices (which strips out the volatile food and energy components) rose 0.1% in February while the annual rate slowed to 1.3% from 1.6% the prior month. The other top-tier release was initial jobless claims and that printed 457K for the latest week. This is well off the weather-induced spike to just under 500K in mid-February and suggest the US labor market continues to improve, albeit gradually. Tame inflation coupled with a job market still on the mend should keep the Fed on hold potentially for the rest of 2010 and we do not anticipate the removal of the extended period language until late 3Q 2010 at the earliest. Meanwhile, the Philly Fed manufacturing index rose to 18.9 in March from 17.6 the prior month - but the details of the report were less stellar. New orders slipped to 9.3 from 22.7 while shipments dropped to 13.6 from 19.7 prior. Prices paid jumped to 38.6 from 32.4 (a new cycle high) while prices received fell to -0.4 from 3.7 (lowest since Nov) - this suggests some serious margin compression for firms in the region. The one bright spot was the improvement in the employment component to 8.4 from 7.4 and a new cycle high.