Brinkmanship in Athens

The game goes on. Athens has submitted no fewer than four different reform proposals. Each has successively been larger and more detailed. The official creditors think more concessions can be made. While the pressure on the new government remains intense, the ECB is drip-feeding authorization for increased ELA funds.

In this game of brinkmanship, it is in the interest of both sides to claim a brink is at hand to try to force the other into new concessions. Some Greek officials have emphasized the week ahead is such a brink. There are two key events.

First on April 8, Greece will auction 6-month T-bills. Greek banks can only buy a limited amount, given the restrictions on what they can do with ELA funds (namely not finance the government). Greek officials appear to be hoping from additional good will gestures by China and, perhaps, Russia. Reports indicate that since the Greek government relented in its opposition to privatization, especially the leasing of the port of Piraeus to a Chinese company, China may have bought more than 100 mln euro of Greek bills at a couple of auctions. A little money from Russia could also go a long way. Greek officials have been talking with both countries.

Second, on April 9, Greece has a 360 mln SDR payment due to the IMF. Greece has a currency mismatch and euro's depreciation the past year has increased the cost of servicing its debt. The 5% appreciation over the past couple of weeks is a small consolation. There have been some threats that Greece would not make the payment. This is part of the brinkmanship tactics. Exploiting the legal grace period would not be surprising. After this payment, the pressing challenge will be rolling over maturing T-bills before the end of the month "review" half-way through the four-month extension granted at the end of February.

Cyclical Recovery in Europe

The cyclical recovery in the euro area will likely be confirmed by the March service and composite PMI reports. Based on the flash reports, both are at their highest level since the time series began three years ago. Of the large countries, France is the clear laggard. After a difficult start to the year, Italian numbers have begun looking better. The decline in the euro, interest rates, and oil appears to be favoring Germany the most. German industrial orders have been following a saw-tooth pattern alternating months of increases and declines. They fell 3.9% February and are expected to have risen 1.5% in March.

Industrial production itself has been more consistently expanding, but last year's monthly average was only 0.1%, and this required a 1.0% rise in December alone. Over the past two years, it has averaged 0.2% a month.  Output decelerated to 0.6% in February, and further slowing is expected in February to its longer-term average.

The Eurozone reports February retail sales in the middle of the week. Few appreciate how strong Eurozone retail sales have been. Consider that the three month average stands at 0.7% and the six month average is 0.4%. The three month average is the strongest since records began in early 2000. The six month average matches the record peak seen in early-2001 and again in early-2005. However, the shopping spree may have ended in February when retail sales are expected to have fallen by 0.2%.

That said, barring a significant surprise, the Eurozone is expected to have grown faster than the US in Q1 15 as it did in Q1 14. The decline in the euro, oil and interest rates continues to provide stimulus the region. Money supply growth has accelerated; bank lending is improving, and financial conditions more broadly are supportive. The ECB continues to purchase public and private securities, and the account of the recent ECB meeting suggests officials are well aware of the formidable structural constraints.

Outside of the euro area, the UK reports March service PMI, and February industrial production and construction spending data while the BOE holds an MPC meeting. The UK economy appears to have expanded around 0.5-0.6% quarter-over-quarter in Q1. The economic data is expected to be broadly consistent with this estimate. The MPC is on hold, and we expect it to be a unanimous decision. Political considerations are overwhelming pure economic considerations in the run-up to next month's election. Currency volatility is elevated, and this is likely to persist for the next several weeks as investors seek protection in the options market.

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