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In the battle of economic data versus government disagreement, it seems the market spoke out about which was the greater influence on the day.
House Speaker Boehner suggested that even if the Senate passes a bill on Sunday that includes full Obamacare funding, he did not expect the House to follow suit. There is also talk that House Republicans are looking to include or shift the defunding of Obamacare to the bill that will need to be voted through to lift the debt ceiling. As one US publication said, the chance of a government shutdown is growing.
US debt ceiling
On the subject of the debt ceiling, it now seems that the US government will exhaust all emergency measures to allow it to borrow on October 17. The government will effectively have $30 billion of cash on hand to meet its different obligations, although it will still receive revenue from various incoming taxes. The other issue here is that the US government is expected to roll over $120 billion in maturing debt on the same day, which is going to be a major test, as who would want to lend to a government who is about to technically default?
Finally on October 22 the CBO (Congressional Budget Office) estimated this could be the first date that the government would have worked through all of its reserves and would effectively have to miss payments, although it seems logical that any institutions or foreign government who would be owed money would be made right at a later date.
The weekly jobless claims have been widely discussed and have got a few traders talking about a strong payrolls report next Friday. There is a real hope that after last month’s massive downward revisions, this month could now be over 200,000 which could increase the probability around a potential December tapering exercise. Lead indicators have been suggesting better job numbers of late and the four-week average on the weekly claims is thematic of a print closer to 200,000, so we could really be seeing a case of catch-up from the September print.
On another note, Jeremy Steins’ comment yesterday around lowering the bond purchase rate by linking it to the jobless rate is interesting, with the Fed cutting the pace of buying for every ten basis point drop in the jobless rate. Mr Stein is always worth listening to as his insights and logic around policy is always enlightening.
Asian trade has once again been lifeless, with G10 and emerging market currencies, commodities, futures and equities showing limited ranges, although we have seen new highs for the year in the ASX 200. USD/IDR (Indonesian rupiah) has rallied 2%, after the Indonesian central bank disclosed it wouldn’t use its currency reserves to prop up the currency should it fall; this seems to be the only thing expressing anything like a pulse. There have been some further quarter-end flows and what a quarter it has been, with all markets doing very well indeed. What happens on Tuesday though is another matter, given markets won’t have the support of quarter-end window dressing, and could also be faced with a potential government shutdown as well.
Ahead of the European open
European markets look set for an equally drab affair with another flat open. Stability should be seen for the open of the Italian market, although with political instability still in focus, the market could turn at any stage. Italian bond yields moved ten basis points higher yesterday, and will likely be a focal point today, with the Italian treasury auctioning €6 billion in two different longer-term bond auctions. We also get a raft of consumer and business confidence readings in Europe, while in the US we get personal income and spending, which are both expected to increase modestly.
On the Fed side we have also already heard from Ester George in mid Asian trade, who was her usual hawkish self, while we get narrative from Charles Evans, Bill Dudley and Eric Rosengren. Mario Draghi also speaks in Milan and given his recent comments about potentially adding liquidity it’s hard to be long EUR/USD ahead of that, despite it being such a low probability for a near-term LTRO (long term refinancing operation) anyhow. With banks still paying back the previously borrowed funds and the limited yield on offer it seems more logical that the ECB will cut rates than provide a new round of liquidity. Apart from these issues, comments from US political players will be closely followed.