Week in review: There were no major data releases over the last few weeks, with the exception of the Eurozone Composite PMI, which surveys current conditions in firms, that fell from 51.7 to 51.4 in December, just above the zero-growth threshold of 50. However, there was significant turmoil in the markets, not only due to thin trading over the holidays but also, in the case of Europe, on the back of the political uncertainty in Greece. Greece is now due to hold Parliament elections on 25 January, after failing to elect its President in Parliament. The extreme-left party Syriza, which threatened in the past to tear up the country’s international bailout, has been leading in the polls for months and could well win the next election. However, its lead has over New Democracy, the party currently in power, is very volatile, ranging from 3 points to 10 points, even within the same polling firm, which means that the outcome could be tight.
Markets are concerned about two important claims made by Syriza in the past: first, that it will unilaterally stop paying its debt and second, that it will leave the euro. Syriza has since toned down on these two issues, but both questions remain valid, particularly as there are rumours that Germany is less inclined to support Greece at all cost. These questions send us back to the beginning of the crisis, which is in itself worrying as four (recession) years later it appears that the solutions designed for Europe have been underwhelming. The emergence of a more extreme Government in a periphery country could either result in other European leaders debating more seriously on different options of how to deal with the mountain of public/private debt or, on the contrary, lead to a more significant entrenchment of the orthodox no default view, with a real possibility of excluding Greece. A Greek exit from the euro area, while appealing in some circles, is very dangerous as it would mean that the more fragile countries would constantly be under threat from the markets, which would effectively drive euro area countries further apart, making the job of keeping the monetary union together much harder.
While the start of the year appears very similar to the beginning of the crisis, the end could turn out to be completely different.
Week ahead: Data-heavy week as most releases usually programmed for the end of the month were postponed to early January. Europe expected to remain on a weak growth, weak inflation trend, at the same time as markets fret over the political uncertainty in Greece. In the US, jobs’ data should confirm the strength of the recovery.
Wednesday 7th January
- EU November unemployment rate: expected to remain unchanged at 11.5%
- EU December Flash Inflation: Markets expect headline inflation to fall to -0.1%, due to energy prices, and core to remain unchanged at 0.7%yoy
- US Federal Reserve due to release Minutes from December meeting: expect more guidance about the start of monetary tightening
Thursday 8th January
- EU December business and consumer survey: Markets forecast small rise, but in line with long term average
Friday 9th December
- US Non Farm Payrolls: After a 321 thousand surge, markets a expect a 240 thousand rise in December, confirming the strength of the US recovery.