China Growth Beats Expectations, But Stock Market Doesn't Care

• BoJ stands pat as it maintains ridiculous forecast The Bank of Japan kept its quantitative and qualitative easing (QQE) program unchanged Wednesday morning as it maintained its (probably unattainable) inflation forecast. The Bank lowered its FY2016 inflation forecast slightly to 0.7% yoy from 0.8% yoy, but kept the FY2017 forecast at 1.9% yoy, thereby allowing it to maintain the fiction that it would achieve its 2% yoy inflation target on schedule. The current inflation rate according to that measure is 0.1% yoy, just barely above deflation. Although the recent output and export data has been disappointing, officials expect the relatively tight labor market to push up wages and thereby cause inflation to accelerate. We’ll see what happens in October, when the BoJ updates its twice-yearly Outlook for Economic Activity and Prices, where its formal forecasts appear.

• My view on the Greek settlement I think the Greek settlement was a lose-lose proposition. On the one hand, the attempt to eject a euro member weakens the strength of monetary union by turning it back into just another version of the Exchange Rate Mechanism, with all the weaknesses of that system. Moreover, Greece was humiliated. On the other hand, as Gideon Rachman so perceptively pointed out in the FT, once again, Germany went to the last minute of negotiations and folded – it may have added a bunch of restrictions and humiliations, but at the end of the day, it did agree to bail out Greece. In that respect, this round of negotiations went exactly like all the previous rounds, and so perhaps the market was correct in pricing in little risk of a Grexit.

• Still don’t believe that things are going according to plan? On Friday I mentioned that this kind of crisis was the way the Eurozone was expected to work. Jean Monnet, the EU's godfather, argued that “Europe will be forged in crises, and will be the sum of the solutions adopted for those crises.” He explained why: “People only accept change when they are faced with necessity, and only recognize necessity when a crisis is upon them.” This idea was corroborated by former US Treasury Secretary Tim Geithner, who related the following story in his book Stress Test:

• A few days later [i.e., late July 2012], I flew to meet Wolfgang Schäuble for lunch during his vacation…He told me there were many in Europe who still thought kicking the Greeks out of the eurozone was a plausible — even desirable — strategy. The idea was that with Greece out, Germany would be more likely to provide the financial support the eurozone needed because the German people would no longer perceive aid to Europe as a bailout for the Greeks. At the same time, a Grexit would be traumatic enough that it would help scare the rest of Europe into giving up more sovereignty to a stronger banking and fiscal union. The argument was that letting Greece burn would make it easier to build a stronger Europe with a more credible firewall. (emphasis added)

• Everyone knows about Greece I just returned from a trip to London. When going through Immigration, the immigration officer asked me my occupation. “Economist,” I said. “And what are you doing in the UK?” she asked. “I’m going to appear on Bloomberg TV Monday morning,” I replied. She laughed and said, “I’ll bet you’re going to talk about Greece!” You know a financial story is big when people who have no relation to the financial world know all about it.

• Lots more negotiations to come Note by the way that Greece’s economy minister said the €50bn in assets that Greece is supposed to pledge to privatize “obviously do not exist,” and added, “I don’t think we will proceed with real privatizations.” Moreover, the IMF has said that it might not be able to participate in the new bailout program if European creditors don’t offer Athens substantial debt relief because the organization’s rules forbid it from participating in a bailout if the country’s debt is deemed unsustainable and there’s no prospect of it returning to the bond market for funding. But Germany has steadfastly opposed further debt relief, so this would be politically difficult if not impossible. Somehow, I think we haven’t heard the last of Greece.

• Today’s highlights: The highlight today will be the Fed Chair Janet Yellen’s twice-a-year report on monetary policy to Congress (the House of Representatives on Wednesday and the Senate on Thursday). We will be looking for confirmation that the Fed is still on track to raise rates later this year. Yellen said on Friday that “(b)ased on my outlook, I expect that it will be appropriate at some point later this year to take the first step to raise the federal funds rate and thus begin normalizing monetary policy.” But one hike or two? And how does the resolution of the Greek crisis (for now) affect her thinking? What’s her view on inflation? While the annual rate of core Personal Consumption Expenditure (PCE) inflation, the Fed’s preferred measure, has slowed, the month-on-month change has accelerated and has averaged 1.7% annualized over the last three months – near the Fed’s 2% target. What’s her view on this? Stay tuned!