Weekly wrap: rescue me – US budget impasse looks set to drift along – 08.10.2013
Source: Henderson Global Investors
On Monday the Democrats and Republicans were unable to reach an agreement on the US budget, leading to a partial government shutdown from Tuesday. Many major stock markets finished the week lower, as did key commodities such as gold, copper and Brent crude oil. In capital markets, investors stepped back from the Treasury bill market over concerns that the US government may delay interest payments this month as there were no signs of an agreement to raise the federal debt ceiling. Despite the uncertainty, US 10-year Treasuries finished the week only around three basis points higher. The Institute for Supply Management’s Non-Manufacturing Index for September showed that the sector has grown for the past 45 months. The latest update on the jobs front from the ADP Research Institute revealed an increase of 166,000 more workers in September. However, this figure missed consensus estimates for a rise of 180,000. Several US economic releases were cancelled, including the keenly watched monthly nonfarm payrolls release.
European Central Bank President Mario Draghi said the eurozone’s recovery continues to be "weak, fragile, uneven" and therefore left the benchmark rate at 0.5%. Meanwhile, Italian Prime Minister Enrico Letta received a boost after Silvio Berlusconi, leader of the People of Freedom party (PdL) made a last minute U-turn by supporting Mr Letta in a confidence vote.
In Asia, the Chinese official services purchasing managers' index (PMI) for September rose to 55.4, up from August’s reading of 53.9. A reading of more than 50 signals sector expansion. Japan’s central bank kept policy unchanged as business sentiment is improving and exports are rising. Japanese investors were buoyed by the upbeat Tankan quarterly gauge of business confidence in the manufacturing sector, which beat analyst forecasts, rising to its highest level since 2007. However, these gains were later limited by prime minister Abe’s announcement that the planned consumption tax rise will go ahead, which some fear will dampen domestic demand.
Should the government shutdown drag on, US markets will become increasingly nervous, pointing to an increase in risk aversion. Investors are still hoping that Congress will be able to avoid a US default by agreeing to raise the $17 trillion debt limit by 17 October. Additionally, there are expectations that the Federal Reserve will postpone the withdrawal of its stimulus programme for now. It will be a quiet week for US data releases. One highlight will be the Federal Open Market Committee’s latest meeting minutes (Wednesday), which could provide some detail on the stimulus tapering debate, the unemployment situation and potential changes to forward guidance on rates. If the University of Michigan consumer sentiment index for October is published (Friday), it may post a lower reading given the budget and debt ceiling impasse. As for September retail sales (ex autos), the consensus is for a 0.4% month-on-month rise (+0.1% previously).
In Europe, German exports are forecast to have picked up in August, with analysts hoping for a monthly gain of 1.3% given better external demand. An improvement in industrial and production data is also anticipated (Tuesday, Wednesday). Meanwhile, French industrial production (Thursday) is likely to weaken given recent worsening business sentiment. Over in the UK, further evidence of a resurgence in the housing sector could be provided by the September print of the RICS (Royal Institution of Chartered Surveyors) housing survey, owing to support provided by the government’s Funding for Lending and Help to Buy schemes. Markets are predicting that August manufacturing production (Wednesday) will maintain its upward trend with a 0.3% month-on-month rise. The Bank of England’s Monetary Policy Committee meets on Thursday. No policy changes are expected for now unless the economy loses momentum or US tapering causes substantial turmoil in the markets.
In China, the September reading of HSBC’s services PMI is due on Tuesday. Finally, Trade balance figures published on Friday may reveal that exports growth has decelerated in September (from +7.2% year-on-year, yoy), while imports are expected to rise by 7.0% yoy, leading to a lower trade balance for the month.