Weekly wrap: Can Washington cut a deal before the 17 October deadline? – 14.10.2013
Source: Henderson Global Investors
Most major stock markets edged slightly higher this week after the Republicans offered the president a short-term debt limit increase to stave off a US debt default. However, the plan was rejected. The treasury market was resilient as longer-dated US government bonds traded within recent narrow ranges while gold sunk to a three-month low. The International Monetary Fund's (IMF) Global Financial Stability Report (GFSR) estimated that market losses on bond portfolios could reach $2.3tn if the Federal Reserve's (Fed) move to start scaling back its asset purchases or fallout from a possible US failure to lift its ceiling on public debt, raises long-term interest rates by 1%. The IMF also reduced its forecast for global economic growth to 2.9% this year (2014: +3.6%), a cut of 0.3% from July's estimate, due to weakness in emerging economies. Meanwhile, Janet Yellen became the first woman to be nominated to chair the US Fed.
According to the Office for National Statistics, UK industrial production fell unexpectedly by 1.1% month-on-month in August against a forecast gain of 0.4% due to a decline in manufacturing output. UK retail sales saw cautious growth, gaining 0.7% on a like-for-like basis from September 2012, driven by demand for electrical and leisure goods. Output in the construction industry fell 0.1% in August, although house-building was up. Meanwhile, the IMF raised its forecast for UK growth this year to 1.4% (2014: +1.9%), up from July's estimate of 0.9%, on improving consumer and business confidence. The Bank of England kept monetary policy on hold for the 15th month in a row as expected.
In Asia, China signed a currency swap agreement with the European Central Bank worth 350bn yuan ($57bn; £36bn). The agreement allows central banks to exchange currencies and firms can settle trade in local currencies rather than US dollars as China looks to build a more international role for the yuan.
As official data in the US continues to be delayed, private sector data will be the highlights of the week. The focus will be on regional manufacturing surveys and the homebuilder survey while October 17 remains the key deadline for the US debt ceiling. On Tuesday, the Empire manufacturing survey is forecast to rise from 6.3 to 8.0 in October while the NAHB housing index may inch down from 58 to 57 on Wednesday, followed by the latest edition of the Fed’s Beige Book, which reports on current economic conditions. Thursday sees the release of weekly initial jobless claims, which are likely to be affected by the government shutdown. Consensus forecasts a rise in housing starts and building permits, bolstered by stronger homebuilder sentiment while the Philadelphia Fed Index may dip as the shutdown hurts the manufacturing sector. On Friday, industrial production in September may show the same gain of 0.4% as in the previous month.
In Europe, industrial production is released on Monday and is expected to reflect a mixed picture of individual countries’ releases. Inflation data in the UK and France is out on Tuesday while Germany reveals its latest ZEW economic sentiment indicator. The euro area sees the final estimate of September consumer prices numbers on Wednesday and UK retail sales are issued on Thursday.
In Asia, third quarter gross domestic product, industrial output and retail sales are published on Friday. The Chinese economy is expected to have grown at a stronger annual rate than the four-year low of 7.5% reported in the second quarter due to an improvement in industrial production.