Jeroen Dijsselbloem, president of the Eurogroup, the euro zone’s finance ministers, confirmed that further talks with the Greek government will be suspended until after the referendum on Sunday. With Greek Prime Minister Alexis Tsipras effectively campaigning for a no vote, it appears that Athens and Brussels have effectively severed ties for now. In a note for clients yesterday, David Rosenberg, chief market strategist at Toronto wealth management firm Gluskin Sheff + Associates, weighed in, saying that a transitional period was possible without a permanent departure by Greece from the euro. “But let’s face it,” he continued. “The key figure behind any compromise will come from [German Chancellor] Angela Merkel, the one actor in this play that is by far the most important figure and yet has been conspicuous by her absence in recent days.”
U.S. economy adds jobs; still falls short of expectations. Despite a decline in the headline unemployment rate to 5.3 percent, today’s Department of Labor report was a disappointment, as payroll and wage figures missed consensus forecasts. The U.S. economy added 223,000 jobs in June; 10,000 shy of expectations. Critically, payroll figures were revised downward for May from 280,000 to 254,000. At 62.6 percent, the working-age participation rate in the labor market was the lowest this past month since October 1977. To date, the improving labor market has been publicly cited by Federal Reserve policymakers as the primary catalyst for an eventual tightening of benchmark rates.
Rates slashed in Sweden. In response to gains by the Swedish krona against primary currencies, the Sveriges Riksbank, Sweden’s central bank, today lowered the benchmark repo rate further into negative territory at –0.35 percent. In the accompanying statement, Riksbank policymakers indicated that rates may remain below zero for an extended period and that they are willing to intervene in currency markets using other mechanisms if necessary.
Chinese stocks see sell-off. The Shanghai Stock Exchange Composite index slipped by nearly 4 percent in trading today, closing below 4,000 for the first time since April. The benchmark Chinese stock index is now off by nearly 25 percent from highs reached last month, a swing of roughly $2.4 trillion, despite easing of margin lending rules and exchange fees overnight as regulators seek to tamp down market volatility.
PayPal buys Xoom. Electronic payment processor PayPal announced yesterday the acquisition of international remittance firm Xoom Corp. in a cash transaction valued at $25 per share or roughly $890 million, or a premium of 32 percent above Xoom’s three-month volume-weighted average price. The move, which puts PayPal into competition with dominant international transfer agent Western Union, comes as the company prepares for its July 17 spinout from online auction site eBay as a standalone public company.
U.K. sells more Lloyds shares. In a filing released today the U.K. government revealed that it has reduced its holding in Lloyds Banking Group to 15.9 percent after a series of sales in the past week. To date, sales of shares in Lloyds have generated $19.5 billion for the nation’s treasury through the unwinding of a stake acquired during the credit crisis bailout. Separately, Chancellor George Osborne has recently indicated that the government will also begin a divestiture of its majority holding in Royal Bank of Scotland Group in the coming months.
Portfolio Perspective: Treasury Markets Prepare for a Holiday — Karl Haeling, Landesbank Baden-Württemberg
Consensus forecasts are for an increase of 233,000 in U.S. June nonfarm payrolls, a drop in the unemployment rate to 5.4 percent from 5.5 percent and a month-over-month increase of 0.2 percent in average hourly earnings. While some traders discussed the potential for an upside surprise, others noted downside risks from schools closing for summer vacations and the closing of 175 Gap stores.
A crucial element to the market reaction to the data involves the fact that U.S. markets will be closed Friday ahead of the Independence Day holiday weekend. Not only will many traders be out of the office on vacation but few participants will want to take positions ahead of Sunday’s referendum in Greece.
This aspect will likely cause many corporate bond hedgers to delay selling ahead of anticipated issuance next week. Not only will hedgers want to avoid the possibility of big bond rallies on Monday if Greece votes no, but a risk-off environment would likely again cause issuers to delay planned deals.
The employment report and the Greece situation will be followed closely by the Fed as well as the markets, as both elements will weigh into the timing of the Fed’s first rate hike in several years. Strong data and calm financial conditions obviously increase the odds of a rate increase sooner rather than later — and vice versa. Generally, economic data for the second quarter appears to be strong enough to suggest sufficient momentum going into the third quarter for the Fed to seriously consider a rate hike in September. Note, however, that the Federal Open Market Committee could easily become too afraid to do it so soon out of fear of disrupting the markets and pushing the dollar higher.
Karl Haeling is head of strategic debt distribution for Landesbank Baden-Württemberg in New York.