0:09 Traders risk averse but not buying into default yet
1:22 Strong data from China, UK and eurozone
3:38 US jobless claims bring four week average to six year low
5:03 Investors seek insight to how current events impact Fed policy
[B]Quiet day expected with US jobs report not being released[/B]
Today’s UK opening call provides an update on:
• Quiet day expected with US jobs report not being released;
• Bohner indicates a willingness to be flexible over the debt ceiling;
• Spike in short term US debt suggests investors becoming more nervous about debt ceiling;
• Octaper unlikely due to lack of data and threats to the recovery;
• BoJ leaves monetary policy unchanged, but willing to act if necessary.
It looks like being an unusually quiet end to the first week of the month today, after it was confirmed on Thursday that the US jobs report will not be released due to the government shutdown.
This announcement has been expected ever since the Democrats and Republicans failed to agree on a budget for the next fiscal year by Monday nights deadline. Now that it has been confirmed, there’s going to be very little else driving the markets on Friday, with no progress expected in negotiations on the budget and debt ceiling on Capitol Hill.
The Democrats and Republicans remain at loggerheads over next year’s funding bill, although in an important development may have been made in the debt ceiling negotiations, less than two weeks before the 17 October deadline. A spokesman for House Speaker, John Bohner, has indicated that he is willing to be more flexible in order for the US to avoid hitting the debt ceiling and defaulting on its debt, which would send the global economy and financial markets into turmoil.
This only sounds like a small move from the House Speaker, but it is the first time we’ve seen either side show an actual willingness to come to a mutually beneficial agreement. The only problem now is, unless the Republicans drop their demands relating to Obamacare altogether, I don’t see a deal being struck. President Barack Obama has made it perfectly clear so far that they will not negotiate on Obamacare, and with him showing no signs of easing up on that stance, the Republicans may be forced to seek other concessions, in order to save face.
The markets are becoming a little more nervous about the prospect of a US default. So far, investors have been relatively calm, with indices only grinding lower. If investors saw this as a genuine threat, losses would be much greater. What we’re seeing now is investors staying on the sideline, as opposed to selling aggressively, although that could be about to change. We saw the first sign that investors are preparing for default yesterday, when yields on the shortest term debt, due to mature shortly after the deadline, spiked to highs not seen since last November. If we do see chaos in the markets going forward, it’s likely to be a very gradual move, with investors still convinced that a deal will be struck, and eager to get back in.
The reason why investors are so reluctant to sell is because this whole debacle, including the government shutdown, is expected to prolong the Fed’s quantitative easing program in its current form. Many had originally expected the Fed to taper its asset purchases in September, which clearly never happened.
An “Octaper” now appears to also be off the table, due to the uncertainty surrounding whether the government will default on its debt and what impact the government shutdown will have on the economy. Many economists are expecting the shutdown to knock around a quarter of a percentage point off the fourth quarter annualised figure for every week the government remains shut. However, this doesn’t appear to take into consideration the impact on business and consumer confidence at such a fragile stage of the economic recovery. Given the number of uncertainty’s, the Fed can’t possibly taper now before December.
This isn’t helped by a number of key pieces of economic data not being released, the most important of which would have been today’s jobs report. The Fed pays close attention to the employment data and given that it opted against tapering last month, surely can’t back it now, without such a key release. That said, the next FOMC meeting doesn’t take place until the end of the month, which allows plenty of time for the shutdown to end and the report to be released.
The Bank of Japan meeting overnight prompted very little reaction in the markets. As expected, the central bank left monetary policy unchanged, while confirming that they are willing to act in the future if necessary. Governor Kuroda is clearly referring to the potentially negative impact on the economy and inflation of the sales tax hike which comes in next year. Last time the government increased the sale tax, Japan was plunged into recession.
Ahead of the open we expect to see the FTSE down 11 points, the CAC flat and the DAX down 3 points.
[B]“Octaper” unlikely as release of US jobs report is delayed[/B]
Today’s US opening call provides an update on:
[ul]
[li]Government shutdown delays the release of the US jobs report;
[/li][li]“Octaper” surely off the table;
[/li][li]Bohner to be more flexible to avoid hitting the debt ceiling;
[/li][li]Fed members to be questioned on tapering chances later this month.
[/li][/ul]
What was originally going to be the most important day of the week is in fact going to be relatively quiet now, given the delay in the release of the US jobs report due to the shutdown of non-essential government departments.
The jobs report is always the most eagerly anticipated economic release but recently it’s carried an added significance, owing to the Fed’s announcement earlier this year that it would begin scaling back its asset purchases later this year. They opted against tapering in September, to the surprise of many in the markets, as the data did suggested the recovery was still very fragile.
The jobs report is arguably the best indicator of economic health and I have no doubt that the previous report, which showed fewer jobs being added in August, along with downward revisions to previous figures, contributed greatly to the Fed’s decision to delay the taper. With this in mind, the fact that the jobs report will not be released until after the government reopens surely takes the “Octaper” off the table. That said, the October FOMC meeting doesn’t take place until the end of the month so the government still has plenty of time to pass a budget.
The only problem here is that any deal between the Democrats and Republicans is likely to include both the budget and the debt ceiling, with the latter not being hit until 17th October. Following this, it is believed that the government can only afford to fund itself until the end of the month. Given the history between the two parties when it comes to these negotiations, a deal is unlikely until before the deadline, which means, technically, the government could remain closed for a few more weeks yet. This would almost certainly mean no tapering until December.
On a more positive note, there were signs that negotiations could finally move forward last night when a spokesman for John Bohner suggested that the House Speaker is willing to be more flexible in order to avoid the debt ceiling. While this may be true, the only way things are going to really going to move forward is if Republicans take Obamacare off the table altogether and seek other concessions from the Democrats in order to save face.
Until we see progress here, the markets are likely to continue to grind lower, although the losses will pick up the closer we get to the deadline. For now, losses have been minimal, with investors reluctant to sell at a time when the Fed is continuing to pump $85 billion into the financial system every month. With an October taper now very unlikely, we’re likely to see heavy buying as soon as a deal on the debt ceiling is struck.
Once again today, we’ll hear from a few members of the Federal Reserve, two of which are currently voting members, William Dudley and Jeremy Stein, and one who will become a voting member next year, Narayana Kocherlakota. As always their comments will be extremely valuable, especially if they provide important insight into how the government shut down and debt ceiling negotiations impact the Fed’s decision later this month.
Ahead of the open we expect to see the S&P up 2 points, the Dow up 16 points and the NASDAQ up 6 points.
Market Analyst, Craig Erlam, talks about how the government shutdown is impacting the markets, including some key economic releases. He also explains why the “Octaper” is unlikely later this month.
An unpredictable week ahead where the markets are driven in a large part by the US economy which continues to lack a resolution to the ongoing government shutdown. The postponement of the data from the Department of Labour last week means that a resolution of this shutdown could provide a raft of data points or else continue the dearth of economic releases. In the UK, the major point of note is the MPC monetary policy decision on Thursday. Meanwhile in the eurozone a quiet week is dominated by German data along with two speeches from Mario Draghi.
In Asia, a similarly quiet week means we are mainly looking towards the release of BoJ minutes in Japan for any indication of possible further monetary stimulus going forward. While in Australia the release of unemployment data on Friday makes for an interesting week for the region.
[B]
US[/B]
Last week marked the primary opportunity for markets to gauge how likely we are to see a October taper from the Fed, given the release of crucial jobs data. However, the inability of the US congress to reach a satisfactory compromise over the budget has meant that we are currently without a spending bill. As a result, the employees at the Department of Labour must take compulsory leave, meaning that until we have a resolution to this issue we will not receive any government calculated economic releases. The most notable of these were the nonfarm payroll and unemployment rate figures, which will be provided once the shutdown is over. This essentially means that the longer this standoff remains unresolved, the less likely we are to get any taper in October. Should the shutdown be resolved we could be in for a busy week while the market catch up. Otherwise, of the events that will certainly go ahead, the unemployment claims, FOMC minutes and UoM consumer sentiment figures will take the focus.
The lack of any DoL jobs data last week means that the focus upon the weekly unemployment claims figure will intensify as investors look for hints as to the tapering decision at the FOMC meeting later this month. The expectation is that for any taper to be feasible, we would have to see a significant deterioration of the unemployment levels, however the expectation is that we will only see a reduction by 1,000 from 308k to 307k. This would likely be insufficient to taper, especially without the headline figures being released. Thus I do not believe that this figure will necessarily be able to convince many that we will see a taper, but certainly has the ability to confirm a non taper.
On Wednesday, the FOMC minutes are released from their last meeting, and with it we will gain a greater understanding of why the committee decided to not taper in September. Of course, the tone of the minutes will be highly notable and will give us a greater insight into what conditions are now deemed as required. Given the impact of the current shutdown, I believe the sentiment is likely to swing further against a taper rather than towards it.
Finally, the University of Michigan consumer sentiment figure is due to be released on Friday. This is the preliminary release and thus has the propensity to move the markets more than the later revisions. Given the lack of data out recently, the markets will likely attribute a greater importance to this and thus we could see some volatility off the back of this release. The market expectations are for a marginal fall to 77.2 from 77.5. However, given the increased worries regarding the debt ceiling and budget throughout September, I believe this could fall further than that.
[B]UK[/B]
A moderately quiet week in the UK, where the two events of note come in the form of the manufacturing production figure along with the monetary policy decision from the BoE. The MPC will decide on Thursday as to whether the current monetary policy will be altered from the current 0.50% interest rate and £375 asset purchase facility. Given the forward guidance provided by Mark Carney, there is no expectation for any change in either direction. However, should the accompanying statement provide anything new, this event has the possibility to really move the markets.
The second event of note in the UK is the manufacturing production figure, released on Wednesday. Given the disappointing manufacturing PMI figure last Tuesday, the markets will be looking to this figure for evidence that the industry is still going on strong. Market expectations point towards a marginal rise from 0.2% to 0.3%. On the whole, we only get a notable market response should the figure come in well above or below estimates and thus anything around this level would likely bring an unremarkable response. However, should this come in sharply away from estimates, there is a possibility of volatility.
[B]Eurozone
[/B]
A quiet week in the eurozone is dominated by the release of a raft of German data along with two speeches from ECB president Mario Draghi. The German economy is the main driver of growth and output for the region, which makes any change in sentiment very important. Therefore the release of the German trade balance, factory orders and industrial production figures in the first half of the week will therefore be a key barometer of how the economy is progressing. The expectation is that we will see a notable improvement on all fronts, where the trade balance moves further into surplus and both industrial production production and factory orders move back into growth. On the whole, these figures are unlikely to have a substantial impact individually unless we get a significantly wide figure. However, we are looking for an overall indicator from all three of these releases as to how the German economy is faring going forward.
On Wednesday and Thursday, we will hear from ECB president Mario Draghi where markets will be looking for further comments following his appearance at the ECB press conference last week. Much of the expectations and emphasis is currently geared towards the possible use of LTRO’s by the ECB, which was not ruled out. Any further comments to further elaborate upon that standpoint would likely move markets and thus look out for any discussion of the topic.
[B]Asia & Oceania[/B]
A quiet week in Asia, where the only events of note come out of the BoJ in Japan. On Wednesday the minutes from last week are released, while on Thursday we will hear from BoJ Governor Kuroda in Washington. Essentially we are looking for the same from both events which is any indication that the BoJ has some form of willingness to increase their current rate of asset purchases or lower the interest rate. The application of a heightened sales tax is also key to bringing down debt, yet could be detrimental to the current recovery owing to lowered demand. Thus it is these two points which should be followed within both the minutes and Kuroda’s speech.
In Australia, the focus will be on Thursday, when the jobs data is released in a period where there seems to be signs of a gradual improvement in the region. The employment change figure is the most volatile and gives a good insight into the direction the employment situation is moving. Market expectations point towards a reversal of the disappointing August figure of -10.8, instead looking towards a rise 15.2k. On the other hand, the unemployment rate is the opposite, giving a less dynamic measure. That being said, this figure tends to grab more headlines at any shift the previous months figure. Expectations point towards the 7.8% figure remaining steady which seems highly possible given the mixed employment change data over past months. Should we see a strong showing from the jobs report, this could provide yet another boost at a time when things are starting to look a little more rosey in the garden for the Australian economy.
[B]Stocks lower as US government shutdown drags on[/B]
Today’s US opening call provides an update on:
[ul]
[li]Government shutdown continues after weekend of failed negotiations;
[/li][li]Bohner appears to soften his stance on Obamacare;
[/li][li]Earnings season kicks off with Alcoa tomorrow.
[/li][/ul]
European indices are trading higher on Monday and US futures are heading in the same direction, as US leaders continue to stall on a deal to avoid hitting the debt ceiling and agree on a budget for the next fiscal year.
Very little, if any, progress has been made over the weekend in relation to these negotiations. President Barack Obama is still not interested in offering the Republicans anything in exchange for raising the debt ceiling and instead appears more focused on ensuring that voters blame the Republicans in the case that it happens.
House Speaker, John Bohner, on the other hand does appear to be softening his stance. Bohner may finally be realising what everyone else already knows, that nothing is going to convince Obama to back down on what is his flagship initiative from his time in office.
Comments from Bohner over the weekend suggest that in order for a bill to pass through the house, it will have to be aimed at trimming the deficit. So far, the Republicans have targeted Obamacare as a means of doing this, however these comments appear to suggest that they would settle for cuts elsewhere.
This is the only way I see a deal being done. So far Obama hasn’t been interested in negotiating at all, but there’s going to come to a point when he must. I’m convinced that sometime next week, a deal will be agreed along these line, allowing both parties to claim a win out of negotiations. Democrats will keep Obamacare and the Republicans make further cuts to spending. Why this hasn’t been agreed already is a farce and exactly why so many people feel let down by both parties.
Elsewhere today, there’s very little happening. The economic calendar is looking very thin, with the only noteworthy release being the Sentix investor confidence figure for the eurozone, which surprisingly fell to 6.1 in October.
One thing that could provide a distraction from negotiations on Capitol Hill this week is the start of corporate earnings season. As always, Alcoa get things underway tomorrow, while the first major bank reporting earnings will be JP Morgan on Friday.
With some pieces of US data not currently being released, due to the government shutdown, investors could turn to these figures to get a better idea of the strength of the economy. Also important here will be companies outlooks, which are likely to focus on the potential risks facing the economic recovery.
Ahead of the open we expect to see the S&P down 16 points, the Dow down 138 points and the NASDAQ down 30 points.
0:09 Continued worries regarding resolution of government shutdown over budget
0:31 House speaker Boehner unwilling to approve clean bill
1:59 Increased likeliness of QE as crisis continues
2:43 Debt ceiling coming into focus as bigger threat
[B]Risk aversion continues as shutdown enters second week[/B]
Today’s UK opening call provides an update on:
• Deal no closer as government shutdown enters its second week;
• Investors to become more negative as the deadline approaches;
• Fed officials scheduled to speak this afternoon;
• UK and Chinese positive data overshadowed by concerns in the US.
European indices are expected to open lower again this morning, as concerns over the US debt ceiling continue to weigh on risk appetite.
The government shutdown has now entered its second week and still, a deal on the budget and the debt ceiling are no closer to being done. The longer this goes on, the more we’re going to see this uncertainty in the markets turn into negativity. So far, losses in indices and the dollar have been relatively small, under the circumstances. US Treasuries have actually risen in price over the last month, driving the yield lower, despite the increasing possibility of a default on the country’s debt.
The closer we get to the 17 October deadline, the more investors will begin to question whether the US will actually do the right thing in the end. I still believe that no one in their right mind would allow the US to hit the debt ceiling, causing havoc in financial markets and risking sending a number of countries, including the US itself, back into recession. A deal will surely be done in the end, which delays the debt ceiling being hit until the end of the year in exchange for some cuts to spending, although Obamacare will likely be spared.
As this drags on, investors are unlikely to pay too much attention to anything else, as it remains the greatest immediate threat to the global economy by some way. Economic data will take a back seat, although it’s still worth keeping an eye on the more important releases. For example today, we have trade balance and factory orders data out of Germany, both of which are expected to significantly improve for August.
The US session will be a little quieter when it comes to economic data. There are a couple of Fed officials due to speak this afternoon, and while neither are voting members, they should be able to provide some important insight into whether the Fed is concerned about the government shut down and debt ceiling, and if so, how they may react to both. The government shutdown is generally not viewed as a massive threat to the economy, although it may encourage the Fed to taper at a later date, while the consequences of the US hitting the debt ceiling could be catastrophic. It will be interesting to see if the Fed has a plan in place, should this unlikely scenario play out.
We’ve had some data out this morning, although it’s had minimal impact on the markets. UK house prices were on the rise again in September, with more than 50% of surveyors now reporting rising prices in their area, while retail sales also rose by 0.7%, falling slightly short of August’ rise of 1.8%.
In China, the HSBC services PMI remained comfortably in growth territory, with a reading of 52.4. This was slightly down from last month’s reading of 52.8, but still seen as a positive thing given that this survey covers more small and medium sized private firms that don’t benefit as much from the targeted government fiscal stimulus. The official reading, which covers more large state owned firms, rose to 55.4 in September, from 53.9 the month before.
Ahead of the open we expect to see the FTSE down 6 points, the CAC up 3 and the DAX up 1 point.
[B]UK in focus as IMF revises 2013 growth to 1.4%[/B]
Today’s UK opening call provides an update on:
• Fears over debt ceiling continue to weigh on risk assets;
• President Barack Obama to nominate Janet Yellen for Fed Chair;
• IMF downgrades global growth to 2.9%;
• UK data in focus this morning;
• FOMC minutes offer insight into tapering decision.
European indices are expected to open lower again on Wednesday, as investors become increasingly risk averse as the 17 October deadline for the debt ceiling approaches.
Once again no progress has been made in negotiations between the Democrats and the Republicans. Both sides appear to be doing a lot more talking in the media on the subject than with each other, which isn’t going to get us anywhere. Obama is still insisting on a clean increase of the debt limit, i.e. no conditionality attached, while Boehner insists that this is not how government works. In other words, both parties haven’t budged in weeks so there’s little hope of a deal being struck before the debt ceiling deadline on 17 October.
Providing a small distraction from budget and debt ceiling talks in the US was reports over night that Obama will nominate Janet Yellen , Vice Chairman of the Federal Reserve, for the position of Chair, replacing Ben Bernanke next year. This is generally seen as a positive appointment for financial markets as Yellen is widely regarded as even more dovish than Bernanke, which could help prolong the Fed’s asset purchases well into next year.
UK Chancellor, George Osborne, was handed a small win yesterday when the IMF gave its backing to his program of austerity and upgraded its growth forecast for the UK to 1.4% for this year, from 0.9% in July, the highest in Europe. The upgrade comes only six months after the IMF warned that Osborne was “playing with fire” by continuing to pursue austerity and urged him to change his course. Osborne opted to stick to his plan and for now, at least, it looks as though his decision was justified.
Elsewhere, the IMF revisions weren’t so positive. Global growth was revised significantly lower to 2.9%, down from 3.2% three months ago. Downward revisions to a number of countries contributed to this overall drop in growth, although the most notable revisions were to the emerging economies, including Brazil, China and India.
The UK will remain in focus this morning, with industrial and manufacturing production figures being released. An increase of 0.4% is expected in both in August, which is another encouraging sign for the UK that the country is recovering well and the recovery is sustainable. The UK’s trade deficit is also expected to narrow in August, falling to £9 billion from £9.853 billion in July. Also being released this afternoon is the NIESR GDP estimate for the last three months, which should show growth continuing to rise into September, as the UK looks to end the year on a high.
Minutes from the September’s FOMC meeting will be released this afternoon, which should attract plenty of interest. Many people were baffled when the FOMC decided to leave its asset purchases at $85 billion per month last month and will be looking at the minutes for an explanation. They will also want to know what conditions will need to be met going forward in order for the Fed to taper its asset purchases. We could see some volatility in the markets around the release of the minutes, especially if they hint at possible tapering in October, although that now looks very unlikely given the debacle over the budget and the debt ceiling.
Ahead of the open we expect to see the FTSE down 19 points, the CAC down 10 points and the DAX down 34 points.
[B]Imminent nomination of Yellen sends US futures higher[/B]
Today’s US opening call provides an update on:
[ul]
[li]Obama to nominate “dovish” Yellen for Fed Chair;
[/li][li]Positivity likely short-lived with Congress miles from an agreement on the debt ceiling;
[/li][li]FOMC minutes to shed light on decision not to taper;
[/li][li]Bad morning for the UK, could improve when NIESR GDP estimate is released.
[/li][/ul]
We could be in for a rare day of positivity in the markets, if US futures are anything to go by, as the imminent nomination of Janet Yellen for Chair of the Federal Reserve buoys investors.
Yellen, the current Vice Chairwoman of the Fed, is believed to be even more dovish than Ben Bernanke, who’s term ends on 31 January. It’s therefore no surprise to see investors respond positively to the news of President Barack Obama’s nomination, especially given that he was previously believed to be more in favour of a much more hawkish Lawrence Summers.
Whether Yellens appointment will have much of a bearing on when the Fed starts tapering is yet to be seen. There is a still a chance that the Fed will not taper before the end of Bernanke’s term, and even if they do, there’s no reason why the purchases cannot be increased again, or the pace of tapering slowed. Yellen will play a key role in the tapering process, if appointed, and this can only be of benefit to investors who have benefitted from the loose monetary policy over the last 12 months.
Investors have had little to cheer about over the last couple of weeks, with Congress firstly being unable to agree on a budget for the next fiscal year, leading to the shutdown of non-essential government departments, before facing exactly the same issues over the debt ceiling. The debt ceiling though is far more serious and has weighed on risk appetite much more. With negotiations, or a lack for that matter, expected to continue for a week or so yet, I don’t think it will be long before risk aversion returns and markets are once again grinding lower.
Minutes from the last FOMC meeting in September will be released on Wednesday. Investors will be keen to find out why the Fed did not taper in September, as many in the markets had expected. A reduction in asset purchases of $10-$15 billion had been almost entirely priced in to the markets, due to investors viewing the improvement in the economic data and hawkish rhetoric from certain Fed members, including Chairman Ben Bernanke, as a sign that tapering was warranted.
This didn’t materialise leaving investors confused and looking for an explanation as to why they didn’t taper and what conditions need to be met in the future for it to begin. The release of these minutes could therefore prompt significant volatility in the markets, although any gains would be limited due debt ceiling talks being a far more important issue at the moment.
It hasn’t been the best start to the day for the UK, which is surely contributing to the FTSE being the only major European index not in positive territory. Industrial and manufacturing production figures posted a surprising drop in activity compared to a month earlier, despite expectations of an increase. The trade deficit, while shrinking compared to July’s figure, was also much bigger than was expected. Hopefully this afternoon’s NIESR GDP estimate will offer a little more positivity, given the improvement in the broader data over the last few months.
Ahead of the open we expect to see the S&P up 6 points, the Dow up 40 points and the NASDAQ up 12 points.
0:10 Countdown continues to possible US default
0:32 Janet Yellen to be nominated as Fed Chair
1:23 UK data disappoints
1:54 German industrial production rises above estimates
2:08 Looking ahead to the NIESR GDP estimate and FOMC minutes
[B]US futures higher on hopes of short-term debt ceiling deal[/B]
Today’s US opening call provides an update on:
[ul]
[li]US futures higher on hopes of short-term debt ceiling increase;
[/li][li]Fed minutes hinting at tapering this year;
[/li][li]BoE to leave policy unchanged, no statement expected;
[/li][li]US jobless claims and Fed speeches on Thursday.
[/li][/ul]
US futures are higher on Thursday, following reports that the House Republicans may be open to a short-term increase in the debt ceiling that would allow the US to avoid default.
All this essentially means is that negotiations will be delayed by a couple of months, at best, and we’ll be back in the same situation again come Christmas. Unfortunately though, under the circumstances that is a positive thing, not just for the financial markets but the global economy, which would suffer hugely if the US was forced to default on its debt.
While most people in the markets still believe a deal will be struck, all you have to do is look at the yield curve on US Treasuries to see that traders are beginning to prepare for the worst case scenario. Yields on very short term debt have risen recently creating a small spike in the early part of the yield curve, a clear sign that investors are becoming nervous.
Had it not been for these developments, markets could have been much lower on Thursday, after minutes from the September FOMC meeting showed that most of the members still saw tapering beginning this year. Since the meeting in September, people have started to come round to the idea that we may have to wait until early 2014 for the first taper, something the minutes suggest is now unlikely.
That said, a lot has happened since that meeting, including the US government shutdown and the ongoing squabbles over the debt ceiling. If the decision on the debt ceiling is pushed back to December, I can’t see how the Fed could justify reducing its support when such a big threat hangs over the economy. It also may not be clear at that stage exactly how big an impact the shutdown has had on the economy, and more importantly, consumer and business confidence.
The Bank of England decision on interest rates and asset purchases today is likely to be a bit of a non-event. No change is expected from the MPC, with the economy improving and members continuing to stand by the forward guidance that was given following Governor Mark Carney’s first meeting in charge. We’re not expecting a statement to accompany the decision either so I don’t expect the markets to react at all.
Of more interest will be the US jobless claims and speeches from a couple of Fed members. Jobless claims are expected to rise slightly to 310,000, up from last week’s 308,000. I’ll be very surprised if we see a significant spike here. It’s generally believed that most companies have cut staff as far as they can while continuing to operate to an acceptable standard. A much bigger concern now in the US is the lack of job creation.
Speeches from James Bullard, Daniel Tarullo and John Williams, the first two of which are voting members on the FOMC, this afternoon will attract some attention following the release of the minutes. Investors will be keen to know whether views on tapering have changed in light of the budget and debt ceiling difficulties, and whether they still see the Fed scaling back its asset purchases later this year.
Ahead of the open we expect to see the S&P up 13 points, the Dow up 105 points and the NASDAQ up 23 points.
0:09 Markets boosted by potential short-term debt ceiling increase
0:49 Most FOMC members still see tapering later this year
1:37 BoE leaves monetary policy unchanged, as expected
2:02 US jobless claims and Fed speeches in focus on Thursday
[B]Europe to open higher as debt ceiling talks get underway[/B]
Today’s UK opening call provides an update on:
• Europe to open higher on hopes over a deal on the debt ceiling;
• JP Morgan and Wells Fargo get earnings season underway for the banks;
• Government shutdown delays retail sales report, UoM consumer confidence still due to be release.
Risk appetite is finally returning to the financial markets, with investors more optimistic over a deal on the debt ceiling now that both sides are finally showing a willingness to seriously negotiate.
While most people have believed all along that lawmakers from both sides would finally start taking these negotiations seriously, I think what we saw in the US and Asia overnight is a collective sigh of relief. Relief that we may not have to wait for an eleventh hour deal on this one, which would create a certain amount of chaos in financial markets, or even worse that the deadline will be hit and no deal will have been struck. The only question now is, how far will they kick the can down the road this time?
Unfortunately, it doesn’t look like they’re going to kick it very far. In fact, the House Republicans have proposed an increase in the debt ceiling that would give the US six weeks until its back in exactly the same situation again. It would appear that US lawmakers are not a huge fan of national holidays. Last year they effectively cancelled Christmas in order to avoid going over the fiscal cliff, now it looks as though Thanks Giving will be the next casualty as the extension would push the deadline back to the end of November.
With a deal on the debt ceiling and the budget looking close, investors can now turn their attention to corporate earnings season. Alcoa kicked things off on Tuesday, with surprisingly strong earnings for the third quarter. Today, it’s over to JP Morgan and Wells Fargo to get things underway for the major banks.
There are growing concerns that this earnings season won’t necessarily be as positive as they have been in recent quarters. One of the major things that has contributed to earnings growth recently has been efficiency savings, such as staff layoff’s, and as we’ve mentioned previously, this can only go on for so long. We’ve seen in the jobless claims figures as the year has gone on that companies are laying people off at a much slower rate, which could have an impact on earnings growth in the third quarter.
Revenues haven’t been particularly strong in previous quarters, but this has been masked by cost cutting throughout the business. It will be interesting to see in the coming weeks whether we’re actually seeing signs that the economy is in fact recovering, and where businesses see earnings being driven from in the quarters ahead. The US economy is hardly taking off and consumer and business confidence is constantly being hit by the battles in Congress. At times it feels like a case of two steps forward and one step back in the US and unfortunately, the most recent debacle over the budget and the debt ceiling suggests that’s unlikely to change.
There’s very little in terms of economic releases to look out for today. Ordinarily we’d have US retail sales as well as a number of other releases today, but as with the jobs report last week, the government shutdown means the release date had to be pushed back. The only noteworthy release comes from the US, where the preliminary reading of the UoM consumer sentiment figure will be released. We’re currently expecting a figure around 76, down from 77.5 last month, however given everything that’s going on, I wouldn’t be surprised to see this much lower.
Ahead of the open we expect to see the FTSE up 25 points, the CAC up 8 points and the DAX up 29 points.
[B]US futures flat despite progress in debt ceiling talks[/B]
Today’s US opening call provides an update on:
[ul]
[li]Small amounts of progress being made in debt ceiling talks;
[/li][li]Shutdown to continue with budget still far from being agreed;
[/li][li]No US retail sales today due to government shutdown;
[/li][li]JP Morgan and Wells Fargo gets earnings season underway for the banks.
[/li][/ul]
European indices are being driven higher on Friday by reports that the Republicans are pursuing a short-term increase of the debt ceiling in a bid to avoid a catastrophic US default.
The increase, which would give government six more weeks to come to a longer term agreement on the debt ceiling, is far from an ideal resolution, however any deal to avoid hitting it for now will always be well received in the markets. It’s still not clear whether the Republicans will want anything in return, which could scupper a deal being done, but at least it’s progress, which is something that hasn’t been seen until now.
The proposal put forward by the Republicans has put people’s minds at ease somewhat, with fears rising until now that both parties would continue to dig in their heels right up to the deadline, in six days time. It is hopefully the first step towards a longer term deal that can remove all of the uncertainty, not just from the financial markets, but that’s been hanging over the economy for months now. Businesses and consumers need to be confident that another horrendous recession isn’t waiting around the corner, and hitting the debt ceiling would undoubtedly bring about such a scenario.
The only downside to this is that the deal doesn’t appear to include an agreement on the budget which would end the government shutdown. While the impact of the shutdown is nowhere near as severe as hitting the debt ceiling would be, the longer it goes on, the more it will weigh on growth in the fourth quarter and therefore damage the recovery.
We can only hope that a deal on the budget would quickly follow, although without the debt ceiling to use as leverage for each side, I get the feeling the debate over the budget could continue. That is unless the Republicans give up their war on Obamacare, and the Democrats offer them an alternative.
As far as today is concerned, aside from ongoing debt ceiling negotiations, it’s looking pretty quiet. The economic calendar only has one notable release, being the UoM consumer sentiment figure, which is expected to fall slightly to 76 from 77.5 last month. It wouldn’t surprise me if the fall was a little bigger given the failure from government to avert a shutdown.
Ordinarily there would be a lot more data out of the US, such as retail sales and PPI. However, the shutdown has meant that these figures, like the jobs report last week, will not be released at a later date. When that is depends on how long it takes government to agree on a new budget.
Corporate earnings season got underway this week, which should give investors something new to focus on. JP Morgan and Wells Fargo get things underway for the banks today and their results will be followed very closely. JP Morgan’s, in particular, are seen as a good indicator of how the industry as a whole will perform.
Ahead of the open we expect to see the S&P flat, the Dow up 2 points and the NASDAQ down 3 points.
0:09 Update on debt ceiling negotiations in the US
1:30 Most US economic releases delayed due to shutdown
2:21 JP Morgan and Wells Fargo report earnings
2:43 Royal Mail up 40% on first day of trading
[B]Debt ceiling and earnings in focus this week[/B]
Today’s UK opening call provides an update on:
• Negotiations continue as Democrats reject short-term deal;
• Investors focus more on earnings in the absence of US data;
• Plenty of UK, eurozone, Chinese and Japanese data being released this week;
• Chinese data mixed over the weekend.
The US is now three days from hitting its debt ceiling and entering its third week of the government shutdown, forcing investors to the consider the possibility that a deal will not be struck by the 17 October deadline and the US could default on its debt.
It’s quite incredible that the uncertainty surrounding the debt ceiling hasn’t transformed more into negativity, given that we’re now so close to the deadline. We are seeing small amounts of negativity, for example European and US futures are both lower this morning, while many Asian indices are trading lower as well. However, these losses are tiny compared with the kind we would see if the US actually hit the debt ceiling.
This suggests that investors remain unconvinced that the debt ceiling will be hit, despite negotiations be unsuccessful so far. It does seem as though Democrats and Republicans are getting closer to a deal, despite the former rejecting a short-term solution over the weekend. It’s just a question now of whether any deal on the debt ceiling will include one on the budget that would allow the government to reopen and limit any damage to the economy. Many have argued that the impact will be small, but it’s hard to calculate the impact on confidence, especially among consumers, who are so important to the US economy.
With a deal now probably not far away, investors will be able to turn their attention to what they should be focused on, corporate earnings season. Alcoa got things underway last Tuesday, while JP Morgan and Wells Fargo were the first of the major banks to report second quarter earnings on Friday. This week a number of other major banks will report earnings, as well as companies focused more on consumer behaviour, which given the lack of US data recently, will provide the best indication of consumer sentiment heading into the final quarter of the year.
The economic calendar is looking a little more full this week, with a number of key economic releases expected from the UK, eurozone, China and Japan. Releases from the US are few and far between, with many still being delayed due to the government shutdown, which is just about to enter its third week. Monday will be a little quiet again, with eurozone industrial production the only notable release, but this will pick up starting tomorrow with RBA minutes, UK inflation and eurozone sentiment figures.
We’ve already had some data out of China over the weekend and over night, which has been relatively mixed. Trade balance figures over the weekend showed an unexpected dip in exports, which weighed on Australian stocks and the Aussie dollar over night. On a more positive note, imports rose 7.4% in September, which suggests domestic demand remains on the rise, something that is crucial for the country to successfully transform away from an export-led model to one more focused on consumer spending.
Inflation data released this morning was higher than expected, at 3.1%, which is still comfortably below the 3.5% target rate. The reading was a positive sign as it suggests that consumer demand is getting stronger in China, which then drives prices higher. This may become concerning once inflation rises above the target as it may prompt a tightening of monetary policy.
Ahead of the open we expect to see the FTSE down 17 points, the CAC down 6 points and the DAX down 29 points.
An interesting week for the global economy where the lack of notable data releases is somewhat overshadowed by the possibility of a US default on Friday. The ongoing crisis within the US means that we are provided with no data out of the Department of Labour (DoL) for the time being, thus unless a deal is reached on the budget, the primary economic release will come in the form of the unemployment claims figure on Thursday. In the UK, the busiest of all the major western economies, the main event of note comes in the form of the jobs data release on Wednesday. However, the eurozone has a more quiet week, where the German ZEW economic sentiment figure dominates.
A particularly lively week in the Asian region and for China in particular. The Asian powerhouse releases a raft of key data points throughout the week, with the most notable being the quarterly GDP figure due out on Friday. On the other hand, in Japan the focus will be upon two speeches from BoJ Governor Haruhiko Kuroda. Meanwhile in Oceania the Australian monetary policy minutes from the latest RBA meeting are likely to draw significant attention.
[B]US[/B]
Another week passed and the US continues to operate with only ‘essential’ government employees due to the continued shutdown brought about by the failure of congress to agree on a new 2014 budget. This continues to affect the release of key data owing to the freeze on DoL data processing, which means we are currently relying on the data from private firms to gauge how the worlds biggest economy is coping. The jobs data is the most notable victim of this and given the reliance upon both the unemployment and non-farm payroll data by the FOMC to decide upon tapering in October, this would likely be the first data which would be addressed should we find a resolution. There is a high likeliness that this ongoing standoff could be resolved given that the debt ceiling deadline is on Thursday and both issues could be tied together. Thus should we see a resolution which would allow the DoL staff back to work, be aware that we could receive some of the data within 2-3 days after resolution.
Of the few economic releases that are due this week, the most notable is likely to be Thursday’s weekly unemployment claims figure. This has taken on a more prominent role with the reliance of the Fed on employment data to judge when tapering should occur. Whilst Octaper seems unlikely with the recent standoff, this is still very notable and has the potential to move markets. Last week saw a significant spike in the figure due to the effects of the government shutdown and the clearing of a claims backlog in California. Thus expectation is for a reduction to around 357k from 374k last time, where the interest will lie in to what extent the continued shutdown is effecting the wider jobs market.
Elsewhere in the week, it is worth being aware of the numerous speeches from FOMC members William Dudley, Charles Evans and Esther George. The markets have no doubt near enough factored in the notion that it is now very unlikely that the FOMC will taper in October. However, remember that we are always looking out for signs of how the Fed gauge the current environment and how accommodative they need to continue to be going forward.
[B]UK[/B]
A busy week for the UK economy, where three key data releases come out in the form of the inflation data, jobs data and retail sales figure. The first of these is the UK inflation figures, where the CPI is the most commonly followed measure. The CPI is utilised by the BoE to gauge price stability, which is their primary target as mandated by the chancellor of the exchequer. However, this figure has taken on increased importance owing to the inclusion of inflation within the forward guidance provided by Mark Carney.
Market forecasts point towards a fall from 2.7% to 2.6%, which would be the third consecutive month that this measure has reduced. This is highly significant as we push towards the target 2%. Also, given that Mark Carney’s forward guidance stipulates inflation should be below 2.5% in 18-24 months, the markets are looking to see the figure fall to enable confidence of long term low interest rates.
On Wednesday the jobs data is released, where the unemployment rate and claimant count have the ability to move markets significantly. Again, it is the link to forward guidance which dominates thinking on the jobs data nowadays, where the question of whether to bring interest rates higher will come into play once 7% unemployment is reached. Thus the unemployment rate will be vital for markets. The expectation is for the figure to remain at 7.7% following last month’s reduction from 7.8%. That was the first reduction in four months and thus I do not expect this figure to fall again this time.
The claimant count change figure is also key to understanding exactly how the employment conditions are changing with a little more accuracy. Expectations point towards the first time in seven months that this measure moves in a negative direction, with the forecasts pointing to a reduction of -24.3k after a fall of -32.6k last time. That being said, the past six figures have beat expectations and thus I continue to hold a positive bias when considering which way this data will go.
Finally, on Thursday the retail sales figure is due to provide an insight into consumer confidence and spending habits as the summer draws to a close. The release is typically pretty volatile, and given the importance of it we often see some significant price action off the back of missed forecasts. The market expectation is for retail sales to have moved back into positive growth this month, with 0.5% expected after -0.9% last time. Behind GDP, retail sales is one of the most significant barometers of economic health since spending patterns cover both current sentiment and forward expectations.
[B]Eurozone[/B]
A quiet week in the eurozone, where the dominant event is likely to be the German and eurozone ZEW economic sentiment releases. Of those two, the German figure is typically the most important given that it is compiled by a German company and surveys 275 German institutional investors and analysts. What is notable is that forecasts are pointing to a divergence of the two figures, where the German number is expected to deteriorate somewhat, whilst the eurozone figure pushes higher. Given this portrays a mixed picture, it will likely have less of an effect upon the markets, and thus we are looking to see if both can move in the same direction. The expected reduction in the German number is minimal, with forecasts pointing towards a reduction from 49.6 to 49.2. However, given that this figure has outperformed on the past two occasions there is a possibility that we could see this move higher.
[B]Asia & Oceania[/B]
A particularly important week for China ahead, where the trade balance, CPI and GDP releases provide a strong focus upon the second biggest economy in the world. The trade balance figure on Saturday is always key given the importance of the Chinese imports and exports for international growth. The much publicised slowdown in the Chinese economy seems to be all but over with last months figure coming in stronger on both fronts. The overall trade balance surplus is expected to fall from 28.5 billion to 25.2 billion, yet it is the finer details of exports and imports which really matter. On this occasion exports are expected to fall from 7.2% to 6.0%, while imports remain at 7%. Make sure to be aware of those two figures as they have the ability to provide a greater indication of how the Chinese trade story is changing.
On Monday, the Chinese CPI figure is expected to show a signficant rise from 2.6% to 2.8% following a 0.1% reduction last month. The Chinese economy, much like most the other major economies, will base their ability to stimulate the economy upon whether prices remain stable. Thus should the inflation rate continue to rise, this would limit the ability of the Chinese to further aid the economy as it has been doing in the past.
On Friday, the all important GDP reading is released for Q3. Much of the talk earlier in the year mentioned a possible reduction to 7% and below for the region given the weaknesses evident at the time. However, we are expecting to see the rate rise markedly for Q3, with estimates pointing to an increase from 7.5% to 7.8%. Should this occur, it would be a major coup for the trade partners of China along with the country itself. On this occasion I feel we may miss the estimates somewhat, given that the past two occasions have fallen short.
Also look out for the important industrial production and retail sales figures out of China.
In Japan, a fairly quiet week will focus predominantly upon the two speeches from BoJ governor Haruhiko Kuroda who is due to speak on Saturday and Friday. Much of the same really to look out for in terms of a market reaction. The focus continues to remain upon whether the likes of Abe and Kuroda see the current economic development as sufficient and whether there is any appetite for further easing measures. Also look out for mentions of the sales tax and whether he believes it will impair growth going forward.
In Australia the main event of the week is the release of minutes from the last monetary policy meeting back on 1 October. The accompanying statement pointed to increasing ease at the current state of the economy, however people will be looking to the minutes for any indication of continued willingness to ease going forward.
[B]Indices resilient as debt ceiling deadline looms[/B]
Today’s US opening call provides an update on:
[ul]
[li]Indices surprisingly resilient as we close in on the debt ceiling deadline;
[/li][li]Chinese exports fall well below expectations;
[/li][li]Economic calendar looking quite empty on Monday;
[/li][li]Earnings season to get into full flow as the week goes on.
[/li][/ul]
European indices are trading lower on Monday, as the battle in Congress over the debt ceiling continues and Chinese trade figures disappoint.
Surprisingly, the losses being seen in Europe so far this morning are not too bad. In fact, the FTSE is now trading relatively flat, while the CAC and DAX are only down by one fifth of a percentage point. Clearly, despite being unsuccessful so far, the negotiations on Capitol Hill are providing some comfort for traders, who remain reluctant to heavily sell their positions.
That may be working for now, but with only three days to go until the deadline, it can only last for so long. If we go another 48 hours without a deal to avoid the debt ceiling being agreed, we could see the rate of selling pickup, and that comfort replaced with panic.
Assuming we get a deal on the debt ceiling, which I still believe we will, the next question is whether a deal on the budget will be included. The government shutdown has been more of an inconvenience than a disaster, which is certainly what hitting the debt ceiling would be.
That said, the longer this shutdown lasts, the greater the impact I see it having on both consumer and business confidence, especially if the debt ceiling resolution is only a short-term one. That is the bigger issue right now which is why Congress needs to get this right at the first of asking. Otherwise the fragile recovery may come under threat.
The Chinese trade balance figure is also weighing on sentiment this morning. While imports actually picked up more than expected in September, exports were very disappointing, falling by 0.3% against expectations of a 6% increase. I don’t expect this to lead to more problems down the line, it could just be a case of the figures becoming more reliable now that the government has cracked down on companies disguising capital inflows as exports.
The economic calendar is looking very light on Monday, although the number of releases should pick up as the week goes on. There are no more notable releases scheduled for today, with the only one so far being the eurozone industrial production figure, which showed a 1% increase in activity in August.
The corporate earnings calendar is also looking a little thin on Monday, although again, this will also pick up as the week goes on. JP Morgan and Wells Fargo were the first of the big banks to report earnings on Friday. They will be followed this week by a number of other banks including Goldman Sachs, as well as some companies focused more on the consumer, which will be followed closely in the absence of US economic data.
Ahead of the open we expect to see the S&P down 9 points, the Dow down 79 points and the NASDAQ down 14 points.