Don’t interpret this market’s lack of movement as “calm”

Most markets are where they were a week ago, as everyone frets the next steps in Europe, the Greek election and next week’s FOMC. But interpreting the market’s lack of directional movement as a sign of tranquility is a grave mistake.

The only conclusion one can draw from today’s choppy, range-constricted market is that this market is extremely uncertain heading into the weekend. Looking at the major USD crosses, rates have hardly budged. And yet elsewhere, there is plenty of drama unfolding. Bund yields are lower, but still not far from the multi-week high of yesterday, but US treasuries suggest continued safe haven seeking, though, to be honest, US rates are only slightly lower than they were a week ago and the USD equity market has hardly changed over that time frame. Nearly every market seems poised in wait and see mode and one wonders if there is anywhere at all to hide in terms of cross-asset correlation.

In Europe today, Spanish yields were pushing 7% as Moody’s downgraded the country’s debt to one step above junk status late yesterday and warned of further ratings chops ahead. Italian 10-year yields were only slightly higher as Italy managed to sell its maximum target of EUR 4.5 billion in bonds of varying durations from 3-8 years.

A great post from MISH (Any rabbits left in the hat?) looks over the basic math of the ESM, the ESM treaty itself and the Spanish bailout and shows that the figures just don’t add up.

Odds and ends
Today’s SNB Libor target setting meeting came without any surprises in terms of rhetorical guidance on the EURCHF peg, The SNB underlined its determination to maintain the peg (“will not tolerate” more CHF strength) and even said that it was ready to take further measures at any time. Inflation expectations were micro-adjusted and the 2012 growth projection was bumped up to 1.5% from 1.0%. As we have discussed of late, the pressure on the SNB is enormous here and in any more disorderly EU scenario, the SNB/Swiss government may decide that giving up on the peg makes more sense than continuing to build FX reserves at such a scary rate. A peg break is still a low odds proposition, but one that can create tremendous moves in gap-like fashion.

The US core CPI data was in-line with expectations, while the headline data was slightly lower than expected and reflects the steep drop in commodity price of late. This and the weak jobless claims data (at the upper end of the range so far this year) had the USD a few pips weaker in places, but the data is so overshadowed by everything else that is going on that it has little relevance today. Still, it does increase the odds of the Fed gearing into action again (or throwing out hints that it plans to) at next Wednesday’s FOMC meeting.

Today’s FT included an op-ed from Greek’s Syriza leader, Tsipras, claiming that his party would look to stay in the Euro, but stop the austerity. What was that saying about having your cake and eating it too?

Looking ahead
Merkel continues to send out the message that Germany won’t be signing up for fiscal union any time soon as we head into the Greek election and a G-20 meeting this weekend. The message she delivered today to the G-20 is that the entire world is behaving irresponsibly and needs to consolidate budgets rather than relying on deficit spending. But the idea of a joint G-20 pledge on budget responsibility this weekend is 100% pie in the sky. Commentary, like this post from the Telegraph’s Evans-Pritchard suggest German sources indicate Merkel’s stance on austerity may be weakening somewhat, though the eventual “solution” may look more like a large “Redemption Pact” that dedicates funds to bring down budget deficits, but comes with extensive strings attached. This contrasts with the idea of Eurobonds/fiscal union.

Tomorrow’s economic calendar finishes the week off with UK Trade Balance data and the latest US Empire Manufacturing survey, the first of the major regional US manufacturing surveys and the only one that didn’t show a negative surprise last month. While some of the US data has been looking weak of late, one theory could be that we are merely in a slight soft patch owing to seasonal shifts from a warm late winter period. At least one interesting indicator – US truck shipments – still show ongoing strength in economic activity. The jury is still out on the US economy in any case until we work our way into the summer.

Stay very careful out there.

Economic Data Highlights

• New Zealand RBNZ left its Official Cash Rate unchanged at 2.50% as expected
• Switzerland SNB leaves 3-month Libor Target Rate unchanged at 0.00% as expected
• Euro Zone May CPI out at -0.1% MoM and +2.4% YoY vs. -0.2%/2.4% expected, respectively and vs. +2.4% in Apr.
• Euro Zone May Core CPI out unchanged at 1.6% YoY as expected
• Canada Apr. New Housing Price Index out at +0.2% MoM and +2.5% YoY vs. +0.3%/+2.6% expected, respectively and vs. +2.6% YoY in Mar.
• US May Consumer Price Index fell -0.3% MoM and rose +1.7% YoY vs. -0.2%/+1.8% expected, respectively and vs. +2.3% YoY in Apr.
• US May CPI ex Food and Energy out at +0.2% MoM and +2.3% YoY vs. +0.2%/+2.2% expected, respectively and vs. +2.3% YoY in Apr.
• US Weekly Initial Jobless Claims out at 386k vs. 375k expected and 380k last week
• US Weekly Continuing Claims out at 3278k vs. 3270k expected and 3311k last week
• US Weekly Bloomberg Consumer Comfort Survey out at -36.4 vs. -37.6 last week

Upcoming Economic Calendar Highlights (all times GMT)

• UK BoE’s King to Speak (1800)
• New Zealand May Business NZ PMI (2230)
• New Zealand Jun. ANZ Consumer Confidence Index (0100)