Ameriprise Financial : We’re at a Pivotal Point of the Year

06/16/2015 | David Joy

At times, the negotiations between Greece and its creditors have been reminiscent of the bank robber who points the gun at his own head and tells the teller to, "Give me all your money or I'll shoot." After all, it is Greece that needs the money and yet is trying to dictate the terms and has the most to lose if it doesn't get it.

But, maybe Greece is not so crazy after all. The ability to acquiesce to the demands of its creditors for further economic reform is always present, so why not hold out as long as possible in hopes of a better deal? The problem is that accidents do happen. Intransigence on either side could lead to deadlines and payments being missed. There are now just two weeks to go before the existing bailout agreement expires, with a sizeable bundled payment due to the International Monetary Fund at the end of June and apparently no money to pay it.

Markets Take Note of the Situation in Greece

So, despite what has been previously mischaracterized as a successive series of deadlines for negotiations to be completed, we are now truly approaching the end. Something has to give in the next two weeks. It now seems that some kind of debt relief is what Greece is after. That can take many forms, but debt forgiveness is less likely than the relaxation of terms. And while it is true that Greece has the most to lose, the rest of the Eurozone will not be left unscathed if Greece exits.

And markets are taking note. After tracing the relative strength of the euro for most of the year, and seemingly ignoring the lack of progress in the Greek negotiations, Eurozone equities have moved sharply lower in the past few trading sessions although the euro has barely budged, as the talks have broken down and the true deadline is fast approaching.

The EuroStoxx 50 Index fell 1.4 percent on Friday and another 1.8 percent on Monday. The German DAX Index has experienced a similar selloff. The Italian FTSE MIB Index has fallen 1.3 and 2.4 percent. And the Greek ASE Index has fallen 10.3 percent in the past two sessions. Some of the nervousness has even washed ashore in the U.S., where the S&P 500 is lower by 1.2 percent in the past two trading days. German ten-year note yields have fallen to 0.82 percent after reaching their recent high of 0.98 last Wednesday. At the same time, the ten-year U.S. Treasury yield has pulled back to 2.36 from 2.48 percent. Not surprisingly, Greek ten-year notes are 90 basis points higher.

The U.S. Focuses in on the Fed

Back in the U.S., the primary focus this week is on the Fed, which will conclude its meeting on Wednesday with its latest decision on monetary policy, including an update on the future path of the Fed funds rate. Expectations for the first rate hike to come in September have increased with the latest round of economic reports. Last week's report on May retail sales may prove to be quite influential in that timing. Although one data point does not make a trend, the relative strength of the report provided the first piece of evidence that consumers may finally be stirring from their winter lethargy.

As the largest sector of the economy, and one which had been glaringly absent from evidence of a second quarter rebound, accelerating consumer spending would fill in the picture of a broader based recovery than what we had been seeing. Coupled with continued healthy job growth, some evidence of firming wages, gathering strength in housing and a modest uptick in inflation, the recent evidence of economic improvement will present the Fed with not only the challenge of how and when to respond, but how to characterize its current thinking.

The Fed to lay the Groundwork for a Rate Increase

While no change in policy is expected this week, what the Fed says will be important in laying the groundwork for an eventual rate increase. And there is no shortage of reports on the economic calendar this week to indicate whether the recent improvement has continued. Industrial production in May, released on Monday, was surprisingly disappointing, as was manufacturing in the New York regional report.

Conversely, the National Association of Home Builders Sentiment Index jumped more than expected, to its highest level since last September, mirroring the recent strength in other housing sector indicators. Housing starts and building permits in May will be released on Tuesday, and are expected to slow from the blistering increase of April, but remain at an elevated pace nevertheless. On Thursday, the Consumer Price Index is likely to show a sharp monthly increase due to higher energy prices and push the year-over-year headline rate of inflation back above zero for the first time in five months.

Important Disclosures:
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.

The S&P 500 is an index containing the stocks of 500 large-cap corporations, most of which are American. The index is the most notable of the many indices owned and maintained by Standard & Poor's, a division of McGraw-Hill.

The EURO STOXX 50 is a market capitalization-weighted stock index of 50 large, blue-chip European companies operating within eurozone nations. The universe for selection is found within the 18 Dow Jones EURO STOXX Supersector indexes, from which members are ranked by size and placed on a selection list.

The DAX (Deutscher Aktienindex) is an index of the 30 most actively traded German blue chip stocks on the Frankfurt Stock Exchange.

The Italian FTSE MIB consists of the 40 most liquid and capitalized stocks listed on the Borsa Italiana.

The Athens Stock Exchange General Index is a capitalization-weighted index of Greek stocks listed on the Athens Stock Exchange.

The NAHB/Wells Fargo Housing Market Index gauges builder perceptions of current single-family home sales and sales expectations for the next six months as 'good,' 'fair' or 'poor.' The survey also asks builders to rate traffic of prospective buyers as 'high to very high,' 'average' or 'low to very low.' Scores from each component are then used to calculate a seasonally adjusted index where any number over 50 indicates that more builders view conditions as good than poor.

The Consumer Price Index is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care. Changes in CPI are used to assess price changes associated with the cost of living.

Investment products are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution and involve investment risks including possible loss of principal and fluctuation in value.

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