Euro Rebounds on Greek Plan B

Positive sentiment emerged in US trading on hopes that Greece will pass an austerity budget and news that Europe is working on Plan B if the vote fails. The euro was the top performer while AUD and NZD lagged on the day. Japanese retail sales are the highlight of Asia-Pacific trading.

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EUR fell in early trading and overall sentiment was negative after Moodys warned that deposits are rapidly being pulled from Greek banks but the trade reversed on talk that Europe may incentivize its banks to rollover Greek debt with a Brady bond-like structure. Greek PM Papandreou also predicted HE WILL HAVE ENOUGH VOTES to pass the austerity budget required for bailout funds. A vote is likely on Tuesday. The ECBs Stark said the central bank is very vigilant. A JULY HIKE IS ALREADY PRICED IN but this helped traders feel a bit more confident about it.

US personal spending was flat compared to the +0.1% expected. Core PCE rose 1.2% y/y compared to the 1.1% expected. Although this is well below the Feds threshold, it is moving in higher and we believe it must fall below 1.0% before the Fed considers QE3.

Treasuries fell badly pushing yields higher by 5-9 bps across the curve. The selloff accelerated after a soft 2-year auction. The rising yields underpinned USD against JPY and CHF. Auctions continue on Tues (5yr) and Wed (7yr). The S&P 500 climbed 0.9% to 1280. Gold fell $5 and closed below $1500 for the first time since mid-May.

Comments from the Feds Kocherlakota (voter) did not relate to current policy, instead he called on the govt to lower the tax deduction on mortgage interest something that has zero chance of happening in the next five years.

Japanese Retail Sales

Japanese retail sales are expected to be down 2.2% y/y in May compared with a 4.8% drop in April. PM Kan appears to be closer to resigning at the end of the current Diet session in mid-August. Nikkei News reports he has offered to quit once bills are passed authorizing a supplementary budget and deficit financing.