With Greece as backdrop, new data get a look

"Greece fatigue" had already set in on Wall Street this week even before the latest fumbling between Greece, the EU and IMF on a debt deal that would keep Greece in the euro zone.

On Thursday, Greece could once more dominate markets, as traders watch for the 8:30 a.m. ET release of key personal income and spending data, and the PCE deflator, an inflation measure watched by the Fed. There are also weekly jobless claims at 8:30 a.m., and a 7-year note auction at 1 p.m. ET.

Stocks headed south Wednesday as negotiations between Greece and EU finance ministers hit a wall. European leaders were set to meet Thursday with Greek Prime Minister Alexis Tsipras. The Eurogroup said it would continue to meet Thursday, ahead of the leaders meeting.

Traders work on the floor of the New York Stock Exchange.
Lucas Jackson | Reuters
Traders work on the floor of the New York Stock Exchange.

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The Dow fell 178 points Wednesday to 17,966, and the S&P 500 fell 15 to 2,108. "Mainly, I think, it's the Greek story. After being closer, they're a little further apart. The market can sense expectations. There will be a can kick of some form. So they got closer on Monday, they're still a little further apart today," said Michael O'Rourke, chief market strategist at Jones Trading. "This is kind of how these negotiations go down. People will believe there's no deal, if Greece doesn't pay the IMF on June 30."

O'Rourke and others said comments from investor Carl Icahn also hit the market. Icahn said on Twitter, and on CNBC, that he's very concerned about overheated markets, especially high yield.

"He recently, not just today, talked about the market as being very expensive, and that could be resonating with people," said O'Rourke.

O'Rourke said the Greece situation has never been closer to default or the potential for Greece to leave the euro, but, ironically, markets are more complacent than ever, having reacted more to Greek news in 2010 and 2011.

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CNBC used quantitative analysis tool Kensho to examine market behavior in 16 instances when there were indications Greece could exit the euro zone, going back to 2011.

The Kensho study found if an investor bought on the rumor the day before the event and sold on the day of the event, U.S. markets did not react much to the news and were flat on average on the day of the event. The S&P was up about 69 percent of the time with an average return of 0.01 percent.

"Greece could move the market (Thursday) but there's a good chance it won't. Same thing with the economic data," said O'Rourke.

O'Rourke said the sideways move in the S&P has been frustrating traders, but the market is relatively quiet. "Any shift one way or the other will cause a break out or a break down, but nobody wants to take action," he said.

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The market could move, however, if there's a surprise pickup in incomes or in the PCE deflator Thursday since any change in the inflation outlook could mean the Fed would be more inclined to look toward September for its first rate hike.

Economists expect a 0.5 percent increase in personal income and an increase of 0.7 percent in personal spending.

J.P. Morgan economist Daniel Silver said he expects to see a 0.1 percent pickup in the core PCE price index.

"What we expect to see tomorrow is core CPI has been firming up and core PCE has been pretty tame," he said. "The Fed is definitely watching CPI inflation. What you've seen is a diverging message. They're paying attention to both."

Core CPI for May is up 1.7 percent year over year.

Silver said his expectation is that the Fed will hike rates for the first time in September, and the data should generally improve over the summer. "As we get further away from the weak first quarter and more signs of growth, I think the Fed, and we, will feel more comfortable with that," he said. Silver expects second-quarter growth of 2 percent.

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"The housing number of the past few weeks have been pretty good. We think that continues. We're kind of trying to gauge how much of the bounce back is weather related, how much is fundamental," he said. The third reading on first-quarter GDP showed a contraction of just 0.2 percent, better than the previous report of a 0.7 percent contraction.

What to Watch

8 a.m. ET: Fed Gov. Daniel Tarullo speaks at the Council on Foreign Relations, New York.

8:30 a.m.: Personal income and spending data, and PCE deflator; weekly jobless claims

9:45 a.m.: Fed Gov. Jerome Powell speaks on building a safer payment system.

1 p.m.: The Treasury auctions $29 billion 7-year notes.

Earnings are expected before the bell from Accenture, Barnes and Noble, Shaw Communications, Winnebago and Commercial Metals.

Nike, Micron and Synnex report earnings after the market closes.