The US dollar is recouping some of yesterday’s outsized losses.  The euro was unable to extend yesterday’s push toward $1.12, perhaps with the help of some fragile stability in the German bund after yesterday’s dramatic slide.  Disappointing UK service PMI saw sterling slide after briefly and narrowly taking out yesterday’s high.    The dollar found a base near JPY123.80, from which has returned to the JPY124.40 area.  The yen’s performance seems to be more a function of cross activity today.

Over the last several months, Greece has made several proposals to break the deadlock.  The rigor, completeness, and commitment may be questioned.  The key point is that they were all summarily rejected.  Given that the previous conditions did not work and the results of the Greek election, the official creditors did not offer a mid-course correction to the strategy that they had foisted on Greece…until today.

And even now, it has not come from the Eurogroup of finance minister, but from the IMF, ECB and, it appears Merkel.   Ironically the Greek government was repeatedly referred to the Eurogroup and was criticized for it end-run attempts.

The vast majority of the money Greece needs is not to pay for government expenditures, but to service its debt, which is largely in official hands.  In effect, the creditors have said, “Do what we say, or you won’t be able to service your debt to us.”   The precise details of the demands are not clear, but some elements have apparently been leaked–though note Greece has been criticized by other countries for taking its case to the media (not that it found much sympathy there).

Greece is to run a large primary budget surplus (~3.5%) over the medium term and must keep the pension fund out of deficit.  It appears that in exchange Greece would be able to re-purpose almost 11 bln euros of unused funds that were to help recapitalize the banks.  Those funds could be used to pay the ECB the 6.7 bln euros due next month (in two payments).

Greek bonds and stocks are rallying in anticipation of a favorable outcome, but it will not be so easy.  Greece’s will reportedly make a counter-offer.  The more onerous the creditors’ demands, the more attractive a default/restructuring becomes.  Greece and Cyrpus have restructured their debt within EMU, which creates precedent to some degree, and, as is well appreciated now, there is no formal mechanism to eject Greece, or any member, from the monetary union.

Questions about Greece will not doubt be featured at the ECB’s press conference.  Draghi will likely recognize that economic data is improving in the euro area–not only in terms of aggregate growth, but also lending and prices.  However, as he indicated before, talk of an early exit from QE is premature.   This is only the third month in operation.  Draghi will also likely be questioned about what appears to be the lack of liquidity (different than volume) in German bunds and the spike in volatility.   He will likely be asked to the ECB’s intent to expedite its sovereign bond purchases before the slowing of government issuance and thinner markets over the summer months.

Draghi will be cautious.  The major lifts for the eurozone economy, weaker euro, low interest rates and the drop in oil all have at least partial reversed, and with it some economic momentum.  Germany’s service PMI fell for the second month though at 54.0 is a little better than the flash (53.9).  France’s service PMI rose to 52.8 from 51.6 in the flash estimate.  It peaked in February at 53.4.  Italy came in at 52.5 after a 53.1 reading in April.  Spain fell to 58.4 from 60.3.  The eurozone composite PMI eased to 53.6 from 53.9.  This is below the 3-month average (53.8).  It is likely consistent with 0.3%-0.4% Q2 GDP.

The UK’s service PMI fell to 56.5 from 59.5.  It is the lowest reading here in 2015.  The composite fell to 55.8 from 58.4.  It plays on fears that the UK economy may have peaked.   Sterling’s losses have retraced nearly 61.8% of this week’s bounce (at $1.5250).

Australia reported better than expected growth.  Growth accelerated to 0.9% in Q1 form 0.5% in Q4 14.  This was a bit more than the market expected.  However, the details were poor.  Domestic demand is weak.  Growth was largely accounted for by exports and inventory accumulation.  The Aussie is holding its own in the fact of the US dollar recovery.  However, it lost the upside momentum after trying to push the $.07800.  Support is seen in the $0.7740-50 area.

The North American morning features not only the ECB press conference but a slew of data. The market generally looks for constructive news. This should include a smaller trade deficit (consensus for $44.0 bln down from $51.4 bln in March) and a tick up in the ADP employment estimate (200k after 169k in April). The service sector ISM may be the exception, and it is expected to slip to 57.0 from 57.8. Later the Fed’s Beige Book will be released. Note that the OECD cut its US growth forecast to 2% from the 3.1% estimate in March. We expect the Fed to cut is central tendency forecast of 2015 growth from 2.5% (2.3%-2.7%) to 2% when it meets later this month.