Greece; Fabulous US employment/ISM data

Lots of conflicting news re Greece. To summarise:

Rumours that the acting PM (Papademos) was going to resign – denied. He has called for a meeting of all political parties for this weekend;
The Euro group meeting scheduled for Monday has been postponed – no new date set, though thought to be later in the week – suggests a deal re PSI and the 2nd bail out remains illusive;
The IIF representatives are heading back to Athens – positive sign, I guess;
All Greek political parties have rejected further cuts in private sector employment proposed by the Troika – they have suggested a 3 year pay freeze – rejected by the Troika;
The ECB refused to comment on suggestions that it should “sell back” its holdings in Greek bonds at the discounted price it bought them at, thereby reducing overall Greek debt further – the ECB have (previously) vigorously rejected the idea. The IMF are pushing for this and/or a similar solution, as Greek debt to GDP (even after the PSI) would otherwise remain above the 120% threshold (nearer 130%) they consider the maximum to be sustainable. The IMF can only participate in a further bail out if they deem that the country’s debt is “sustainable”;
The Dutch and the Germans expressed opposition to “official sector involvement” (“OSI”), proposed by the IMF and supported by some within the EU bureaucracy;
The German Finance Minister Mr Schaeuble made a number of cryptic remarks which suggest that Greece may have to EXIT the Euro Zone – Mrs Merkel contradicted him.

Basically, its all still up in the air. However, if I was a suspicious person, I get the feeling that there is an increasing number of people/countries in Europe who would quite welcome Greece’s exit from the Euro Zone – quite frankly, I don’t blame them. I, as I suspect most others, have no idea as to the outcome of the current negotiations, other than there is a view (which I do not share) that it may be marginally in everyones interest to reach “an agreement”, which, in effect, buys some more time before the inevitable Greek default. I remain of the view that Greece has proven to be a complete waste of time, money and effort and that it should be cut loose asap;

The ECB meets next week. Will they cut by 25bps? – possible, but (marginally) unlikely in my view. However, they certainly will have to, if Greek talks fail and indeed, they will have to do much more. I do however believe that the ECB will reduce their benchmark rates below 1.0%, which is another reason that I’m bearish on the Euro;

The important UK services index (services represents over 75% of the UK economy) rose unexpectedly to 56, from 54 in December, a 10 month high. Forecasts were for a decline to 53.3. The new orders component rose and business confidence improved by the largest amount since records began in 1996. The UK economy shrank by -0.2% QoQ in the last Q of 2011. This data is very good news. The BoE is to meet next week and advise on QE3 or not – personally, I think they will not wish to disappoint and will want any positive momentum to become embedded, though due to the volume of recent purchases, the amount may be limited to Sterling 50bn (Sterling 75bn if there is a problem re Greece);

The data reported yesterday in respect of January US NFP data was exceptionally strong. Payrolls rose by +243k, as opposed to a forecast of 140k and, in addition, private sector employment rose by +257k. November and December data was revised higher by +57k and 3k respectively. In addition, annual benchmark revisions disclosed that a further +266k jobs were created in 2011, than previously estimated. U6 saw a huge decline, from 16.4% to 15.1%. The employment to population ratio rose to 58.5% whilst the civilian force participation rate remained at 63.7%.The number of people unemployed declined to 12.8mn in January.

There were significant gains in manufacturing, but also in health care and in the service sector. The unemployment rate declined to 8.3%, from 8.5% previously. Total hours worked in the private sector rose by +0.2%, though by +1.2% in manufacturing – important as a 1/10th increase in average weekly hours equates to around 350k new jobs. Overall, the average work week was unchanged. Average hourly earnings rose by +0.2% MoM, or +1.9% YoY.

Milder weather clearly helped, as the number of people who could not work was only 206k.

However, these are very strong numbers;

Not only was the NFP data strong. The ISM non manufacturing index rose by +3.8 points to 56.8, the strongest reading in almost a year. The very important employment component soared to 57.4, the highest level in 6 years. New export orders rose by +5.5 points to 56.5 and overall, new orders increased by +4.8 points to 59.4. The inventory component declined by -1.5 points, suggesting that businesses were reducing inventories. This will negatively impact 1st Q’s GDP, but is positive thereafter, as businesses have to restock;

The superb US data (both NFP and ISM) resulted in European and US markets closing at their highs. There will be talk of US QE3 being unnecessary, but Bernanke’s testimony last week was pretty dovish (indeed more so than expected, I would argue) and I remain of the view that QE3 will happen, though may be delayed a bit.

If it were not for Greece, I would remain positive for the present, but those guys have an amazing ability to ruin a party. In addition, I am concerned that all the bears out there are U turning and now getting overly bullish – normally a very bearish sign, as they inevitably turn at the wrong time – and that the VIX is low (17 – near last May/July’s low) and getting lower, once again a bearish signal. As a result, I sold some (approx 25%) of my financials into Friday’s very strong market and will look to build up a few shorts – mining sector – maybe even EM’s shortly.
A$, Yen and Euro (against US$) looking like shorting opportunities as well.