Markets shrug off debt ceiling antics as tight FX ranges hold another week
14/Oct/2013 • Currency Updates•
Investors and traders continue to take a philosophical view of the negotiations in Washington over the debt ceiling. Equities fell early in the week, only to recover all their losses and more to end up anywhere from 1-2% in the main world indices. Fixed income markets and FX markets barely moved. Short term US debt instruments (T-bills) sold off slightly, but are still pricing only a tiny risk of actual delay in payment.
We share the markets’ calm outlook regarding this artificial crisis in the US. The Republican party’s poll numbers are cratering, and pressure from financial and business leaders is building to put an end to the nonsense. Republican leadership has already given up on their original demands for a year delay in implementation of Obamacare, and is at this point just looking for an exit that does not look like unconditional surrender. Even if no agreement is reached next week, we discount heavily the possibility that any coupon payment and/or redemption of US debt will actually be delayed.
The Bank of England stood pat in its October meeting, keeping policy setting unchanged. This was largely as consensus expected. Manufacturing delivered a rare negative macroeconomic surprise, falling a sharp 1.2% MoM in August. This weak print contradicts the strength we had seen in the PMI sentiment numbers, and brings back worries that a new gap may be opening between sentiment numbers and actual outturns in the data. However, the strength on previous data should be enough to push next week’s GDP release a bit above 3% at an annualized rate. Sterling, however, largely ignored domestic news and traded in a very tight range to end essentially unchanged against both the dollar and the euro.
There were no surprises at the ECB monthly meeting last week. No change in policy was announced, and President Draghi continued to express his displeasure at markets expectations for higher rates in the future. However, he stopped short of threatening an actual response. There was little market reaction to the meeting, as traders continue to focus on political developments in the US and elsewhere. There was a sliver of good macroeconomic news, as German industrial production in August rebounded strongly from its deep July fall. However, this still leaves eurozone industrial production over July and August tracking over 1% lower than the 2Q 2013 level. For our part, we await the October employment data from Italy and Spain in order to gauge the extent to which positive sentiment about the periphery is supported by actual data.
It is difficult to gauge the impact that the Federal shutdown is having on the US economy, since most macroeconomic data releases have been indefinitely delayed.Last week, the only releases of note were weekly jobless claims and the Michigan report in consumer confidence. The former rose by 66,000, of which half can be attributed to a one-time statistical adjustment in California. The latter fell a bit over 2 points. Extrapolating from these two data points, we estimate that the impact on the US economy of the Federal shutdown is fairly modest so far. Things will get somewhat more serious once the debt ceiling is hit and the Treasury starts prioritizing payments sometime later this week, but we still expect some sort of agreement to be patched together before then.