Over the course of yesterday, it was confirmed that there was a memorandum of understanding between the leaders of the major political parties in Greece and the troika. Greek politicians have apparently agreed to the 22% reduction in the minimum wage demanded by the troika. Video:

Part of the explanation for the higher rate of prices growth is the distortion from the Chinese New Year, which often triggers a surge in spending. Even so, what will most concern policy-makers is that consumer spending is still so strong, despite a determined regime of tightening over the past eighteen months.

The issue has proven to be a key sticking point (see blog last week ‘The ECB will have to yield on Greece’), but it now appears that the central bank will undertake an exchange with the EFSF (for EFSF bonds), so that the ECB will not make any profit on its holdings.  Greece will then repay the EFSF at the ECB’s original purchase price. Video:

That said, a closer examination of the statement reveals that the RBA is still disposed towards further easing. Global growth expectations for this year have been revised lower, labour market conditions down under are soft, and inflation is expected to decline further over coming months. As the statement confirms:”Should demand conditions weaken materially, the inflation outlook would provide scope for easier monetary policy”. Video:

Furthermore, both November and December jobs growth were revised higher by 60K, and the unemployment rate fell to 8.3%, the lowest reading for nearly three years. Of course, for some this sits uncomfortably with the Fed’s pledge to keep rates close to zero for nearly the next three years. Video:

This is certainly a positive development that has helped to underpin some of the recent optimism regarding the US economy. But, as always, it’s a complex picture, more so than the headline numbers suggest. Video:

The Swissie only needs to appreciate another 0.5% vs. the euro to reach the 1.20 level, so the market is becoming increasingly nervous of further intervention by the central bank. The remarkable thing is that this has come at a time when the euro has been subject to some fairly severe short-squeezes, a function of the stretched short positions which lie beneath (see comments below). Video:

Last Friday’s GDP numbers were remarkably weak, confirming the prognosis of a number of Fed officials who feel that the economy could do with some further assistance. In addition, the dollar has been sold as a counterpart to the sharp short-covering rally in the euro; recall that two weeks ago, euro shorts registered a record high. Video:

There were numerous issues to worry about, including the CDU’s decision to scupper Angela Merkel’s idea that the EFSF and ESM could run in parallel, the German proposal to appoint an EU budget commissioner to veto tax and spending decisions in Greece and fresh concerns over the rapidly deteriorating state of affairs on the Iberian Peninsula. Video:

Meanwhile, government consumption took nearly 1% from headline growth, with net exports also detracting, although only a small 0.1% negative contribution. The extent of the inventory correction and (less so) disappointment with the level of consumption suggests that the US will struggle to maintain this level of output in the first quarter.