Today Federal Reserve chairwoman Janet Yellen begins the first of two days of testimony on Capitol Hill. With expectations riding high that the March Federal Open Market Committee meeting will finally announce a firm date for tightening, her words will be carefully parsed by investors seeking clues on policy. Most strategists anticipate that Yellen will refrain from providing any firm guidance on timing of rate changes — that is, beyond indicating that the removal of “patient” language in the most recent release should not be interpreted as a near-term commitment to raise. Lawmakers will likely also drill into concerns about economic conditions abroad and oil-price-fueled deflationary forces. Many market participants seem to be echoing comments that Société Générale macro strategist Kit Juckes’s notes made in a client note this morning: “If she wanted my advice (there’s no chance of that) I would suggest that she aim to get the market to price in the start of the rate-hiking cycle so that a move away from the zero bound can be achieved without market turmoil, while at the same time providing reassurances about the pace and extent of the rate-hiking cycle so that the market prices in an incredibly modest pace of hiking.” For investors simply seeking closure, a strong signal from today’s testimony could go a long way.
Greek terms delivered. Media outlets in Europe indicate that the Greek government submitted proposed terms to Eurogroup leaders late last night. The measures spelled out in the document, which include labor and tax collection reforms, have already sparked anger among supporters of the ruling Syriza party, which had pledged to make no concessions to the European Union in pursuit of debt relief.
German GDP rises. Revised fourth-quarter 2014 GDP data released today by Germany’s Federal Statistical Office showed the full-year pace of growth in Germany rise to 1.6 percent, versus an earlier estimate of 1.4 percent. With employment now at a postreunification high and gains in industrial activity, the EU’s largest economy appears poised to maintain its relative outperformance to large neighbors.
OECD sees U.K. speeding ahead. In a report issued today, the Organization for Economic Cooperation and Development estimated that U.K. GDP has exceeded precrisis levels and that the pace of growth there is accelerating faster than those of the country’s primary EU peers. The report specifically cites structural reforms in labor markets as a primary driver for prosperity.
BMO Financial Group reports $1 billion in net income. BMO Financial Group fiscal first-quarter results, announced today, reported income levels of $1.46 per share with an adjusted net of $1.53 per share. This represents a 6 percent decline year-over-year and was below consensus analyst estimates, with bank management emphasizing the negative impact of low oil prices on bank operations in the accompanying press release. The Toronto–based bank also announced a quarterly dividend of $0.80 per share.
Portfolio Perspective: Eurogroup to Examine Greek Reform Proposals — Antonio Garcia Pascual, Barclays
On Friday, Greece and the Eurogroup took an important step towards agreeing a four-month program extension. Completion of the program review would qualify Greece for the remaining €7.2 billion ($8.15 billion) disbursement. Key to Friday’s step forward was the Greek authorities’ commitment not to roll back previous reforms or make any unilateral decision that could jeopardize completion of the program review.
But the extension is conditional on the Eurogroup’s approval of a list of key reforms that the Greek government is due to submit today. The Eurogroup’s approval could come as early as today to trigger the national procedures from tomorrow. If the reform measures are accepted by the Eurogroup, we think that markets are unlikely to be overly concerned about an imminent exit or Greece running out of cash for some time, unless negotiations fall apart over the next few months — a possibility not to be entirely dismissed. Negotiations between Greece and the Eurogroup are likely to be complex over the coming months, however, especially as key issues such as future official sector involvement, specific public expenditure plans, labor market issues, social security and future privatization plans come to the fore.
We would expect that the flexibility offered by the head of the Eurogroup (not evident in the press release from the Eurogroup on Friday) could come in the form of a slightly less ambitious fiscal consolidation path for Greece, such as, for example, a lower target for the primary balance. This may be part of the policy details submitted by the Greek authorities today.
By April, all reforms, known as “program conditionality,” should be agreed by the Greek government and the institutions (formerly known as the troika), which may then lead to disbursement of the remaining funds available under the current European Financial Stability Facility program and money from the International Monetary Fund. In the meantime, the Greek government may again ask the European Central Bank for bridge funding, through increased issuance of T-bills for example, but we think the ECB may only be willing to fund repayments to official creditors that are scheduled over the next couple of months.
Going forward, we will need to monitor closely the reaction by both Syriza’s members and its voters on this decision to request a program-extension, as well as the reaction in Spain. How will voters see left-leaning populist Podemos? Also, we will need to watch how the electorate reacts with radical-right parties in core Europe, such as Alternative für Deutschland in Germany or the National Front in France.
Antonio Garcia Pascual is the chief euro-area economist at Barclays in London.
