by Calculated Risk on 6/18/2012 08:59:00 AM

From the WSJ: Spanish Yields Surge; Greek Relief Wanes

Spain's 10-year government bond yield soared above 7% and equities lost early gains ...

"Greek election results are unlikely to resolve euro-zone uncertainty," said Barclays. "Instead, the focus should shift to the June 28-29 EC summit, the likely renegotiation of the Greek austerity package, and to Spanish yields."

Here are the Spanish and Italian 10-year yields from Bloomberg. The Spanish 10 year yield is up to 7.28%, and the Italian 10 year yield is at 6.16%.

Note: The preliminary results of the independent Spanish Bank Stress Tests are due today. This is the results of the tests by Oliver Wyman Ltd. and Roland Berger Strategy Consultants.

On Thursday, June 21st, there is a meeting of the euro zone finance ministers, and the following week, starting on June 28th, is a two day European summit in Brussels.

by Calculated Risk on 6/17/2012 09:17:00 PM

The election in Greece was THE story on Sunday. New Democracy received the largest percentage of the vote - around 30% - and they still need to form a coalition government. There is no way they can meet the terms of the memorandum - so even if a government is formed, this will blow up again without further concessions. Meanwhile the Greek economy is collapsing and the unemployment rate is at record levels. Very sad.

For a few questions about what comes next, see from Joseph Cotterill at the Financial Times Alphaville: Greece, the post-election questions

• At 10:00 AM ET on Monday, the June NAHB homebuilder survey. The consensus is for a reading of 29, unchanged from May. Although this index has been increasing lately, any number below 50 still indicates that more builders view sales conditions as poor than good.

The Asian markets are up tonight. The Nikkei is up about 2%, and the Shanghai Composite is up 0.5%.

From CNBC: Pre-Market Data and Bloomberg futures: the S&P 500 futures are up about 9, and Dow futures are up 90.

Oil: WTI futures are up to $85.21 (this is down from $109.77 in February) and Brent is up to $99.20 per barrel.

Saturday:
• Summary for Week Ending June 15th
• Schedule for Week of June 17th
For the monthly economic question contest (three more questions for June):

by Calculated Risk on 6/17/2012 06:56:00 PM

Some analysts think the FOMC will announce QE3 this week, others think the FOMC will wait until August or September.

It is also possible that the Greek election will influence some FOMC participants to wait until "Operation Twist" ends in a few weeks and then see what happens.

Usually the Fed provides pretty clear signals in advance of additional accommodation, but this time the smoke signals have been a little confused. From Tim Duy: Communications Failure

Reading Cardiff Garcia's preview of next week's Fed meeting, I was struck by [a] chart from Nomura

The extensive discussion of options with arguments for and against reminded me of the fog that hangs over this next meeting. We really have no idea what the Fed is going to do or why they are going to do it. Reasonable analysis ranges from nothing to massive quantitative easing.

Goldman analysts recently put the odds of QE3 this week at 75%, from Goldman economist Sven Jari Stehn on June 8th:

Although the uncertainty is significant, our model points to a probability of easing of 75% at the June meeting. Moreover, financial conditions are critical: were European stress to ease between now and the meeting the estimated probability of easing could drop to around 50%. Conversely, any further tightening in financial conditions from here—such as turmoil surrounding the June 17 Greek election—would push up the likelihood of easing in June.

I think the odds of QE3 are very high, but I'm uncertain on the timing. One key is changes in the FOMC financial projections that will be released this week.  Here are the projections from the April meeting.

The following April chart shows when participants projected the initial increase in the target federal funds rate should occur.


Click on graph for larger image.

"The shaded bars represent the number of FOMC participants who project that the initial increase in the target federal funds rate (from its current range of 0 to ¼ percent) would appropriately occur in the specified calendar year."

I expect some movement towards later years - and that would be an argument for QE3 this week.

The following table shows the FOMC's projections for GDP. Given the recent weak data, I'd expect the June projections to be lower for 2012 than the April projections.

GDP projections of Federal Reserve Governors and Reserve Bank presidents
Change in Real GDP1	2012	2013	2014
April 2012 Projections	2.4 to 2.9	2.7 to 3.1	3.1 to 3.6
January 2012 Projections	2.2 to 2.7	2.8 to 3.2	3.3 to 4.0

¹ Projections of change in real GDP and in inflation are from the fourth quarter of the previous year to the fourth quarter of the year indicated.

It is also likely that the unemployment rate forecast will be unchanged or revised upwards. Currently the FOMC expects the unemployment rate to be in the 7.8% to 8.0% in Q4. Even that level argues for additional accommodation. At the same time, the recent inflation data suggests the FOMC's inflation forecasts will be revised down (or unchanged).

The data suggests the FOMC will announce QE3 soon. But it is hard to tell when, and maybe we will see some clearer signals tonight or tomorrow.

by Calculated Risk on 6/17/2012 02:56:00 PM

From Reuters: Greek conservatives to win election: official projection (ht curious)

Greece's New Democracy conservatives are set to win ... The projection showed New Democracy taking 29.5 percent of the vote, with SYRIZA in second place with 27.1 percent. The Socialist PASOK followed in third place with 12.3 percent.

The result translates into 128 seats for New Democracy and 33 seats for PASOK, giving the two pro-bailout parties a slender majority in the 300-seat parliament.

New Democracy and PASOK back an EU/IMF bailout providing Greece with funds to stay afloat.

From the Telegraph: Greek election: Live

Official exit numbers are in, and New Democracy are on course to win. The numbers: ND 29.5pc, Syriza 27.1pc, Pasok 12.3pc, Independent Greeks 7.6pc, Golden Dawn 7pc, Democratic Left 6.2pc, Communist Party of Greece 4.5pc. These are numbers from Singular Logic, commissioned for the job by the Greek government.

This suggests New Democracy will be able to form a government. New Democracy's leader, Antonis Samaras, will try to change the terms of the bailout agreement, but generally supports the bailout - and strongly supports staying in the euro.

With the Greek economy in free fall, this just buys a little time until the next review shows Greece is far short of the bailout goals.

by Calculated Risk on 6/17/2012 12:12:00 PM

The Greek media is reporting on some early exit polls. This shows that it is very close between New Democracy and Syriza:

New Democracy: 27.5% to 30.5%

Syriza: 27% to 30%

Pasok: 10 to 12%

The 1st place party gets a 50 seat bonus (out of 300 total seats) and the parties split the remaining seats by the percent of the vote (excluding all parties with less than 3% of the vote).

If ND wins, they will probably form a government with Pasok (it would be close with the 50 seat bonus). However if Syriza wins, no one knows.