- European officials briefing that a Greek deal is unlikely today, with next week being the target
- Heroic assumptions needed for Greek debt sustainability without relief
- December job openings point to solid labour market in the US, a positive sign for FOMC members
Greek interim deal unlikely this week
Today’s Eurogroup meeting and tomorrow’s EU Summit are unlikely to provide an interim deal for Greece. A European Commission spokesperson told the press that ‘we have low expectations that any final agreement will be’ at this week’s meetings. This was later confirmed by the German finance minister Wolfgang Schaeuble at the G20, who bluntly said that ministers ‘would not agree’ a deal at the Eurogroup.
Next week more likely timing
An interim deal does seem likely before long though, allowing some breathing space to agree a longer term programme. An EU official told the Reuters news agency that the target was to reach a deal in time for next week’s Eurogroup meeting on Monday. Financial markets will be watching closely for the commentary emanating from this week’s European meetings, to see how likely a deal is next week.
Mood on financial markets positive
After Monday’s sell-off, financial markets had a more positive tone on Tuesday. Investor sentiment improved, with equities and Greek bonds moving higher in unison. While investors reacted badly to the Greek PM’s speech on Sunday, they were heartened by comments from the Greek finance minister Varoufakis on Monday. He said that Greece agreed with 70% of the existing adjustment programme.
Greek debt does look to be a problem
The French central bank Governor Christian Noyer become the latest official to try and play down Greece’s huge government debt. He said at the G20 that it did not ‘seem to be the problem’. The Greek debt ratio currently stands at around 175% GDP. The IMF is projecting that it will fall to around 120% in 2022, which is still rather high. However, even this scenario is based on rather optimistic assumptions. For instance, it assumes nominal GDP growth accelerates to around 5% in 2016-2019, and the primary surplus rises and sticks to 4-4.5% GDP for many years. These are rather heroic assumptions.
Greek debt sustainability remains a serious problem in our view. Debt relief dependent on reform looks likely to be a part of any long-term agreement for Greece.
More signs of a solid job market in the US
Job openings edged up in December to 5.0 million from 4.8 million the previous month. This was the highest level of job openings since December 2001. Measures of job turnover, which tend to lead wage acceleration were largely steady. The hiring rate ticked up to 3.6% from 3.5% in December, while layoffs were unchanged at 1.2%. However both measure of turnover remain at elevated levels. Although the Job Openings and Labour Turnover released yesterday lags the labour market report released some days ago, both reports confirm that the US labour market is recovering.
Yellen dashboard a positive sign for the FOMC
The FOMC routinely reviews a wide variety of labour market indicators. Indeed, the Chair of the Fed considers payrolls and the unemployment rate as the primary indicators, but has endorsed a dashboard approach for looking at the labour market. The dashboard, which includes the pace of hires, quits, job openings and lay-offs has in general improved throughout 2014. Most indicators in the dashboard are now above their historical levels, except for the participation rate and wages. These, however, improved slightly in the last labour market report. Going forward, we expect further improvement in the turnover rate. This remains a strong fundamental force helping workers to find jobs and it will also support wage growth. The FOMC will be looking for stronger wage growth to lift core inflation over time.