Better late than never, but never late is better

 

  • Congress passes deal on budget and debt ceiling, extends until Jan/Feb
  • Dollar weakens as markets now foresee later tapering schedule
  • UK jobless claims fall by most since 1997

The US Congress has finally got its act together and decided to reopen the federal government and elevate the debt ceiling little more than 24hrs before the deadline. The Senate-founded bill that sees the government funded until January 15th and the debt ceiling given enough room for spending until February 7th passed both chambers of Congress easily. The Senate was never going to be the issue and a vote of 81 to 18 took care of that. The House approved the bill 285 to 144 with around 90 Republicans voting for the measure.

With the near-term risk of a sovereign default now out of the way, the discussion is now about how much damage the shutdown and debt ceiling have done to the US economy. The ratings agency Standard & Poor’s, who have stayed quiet on ratings movement during the past few weeks, estimate that the shutdown has taken 0.6% off annualised GDP, roughly equivalent to $25bn. The key to future spending however, will be confidence going forward. With the prospects of another fight in the new year, there is little at the moment to stop consumers keeping their hands in their pockets over the important festive period for fear of another shutdown.

Dollar movement has been sanguine with moves taking place well within pre-defined ranges. The USD strengthened as soon as it became clear that a deal was likely to be signed in the coming hours but has since slipped off. The likely turn in sentiment is down to what the market will now be thinking on the prospects for US monetary policy. We can now easily cross-out the chances of any form of monetary policy tapering at the October meeting and, given the likely damage to the economy and the economic data that the shutdown has caused, a December meeting decision also now looks more unlikely. January? Maybe. March? More likely. As it stands at the moment I would expect traders are pushing their tapering expectations further into 2014, loosening the USD as a result.

As it stands, all the data we have missed in the near 3 weeks of a government shutdown will be released on Monday in one, large, number-filled lump.

Elsewhere, we saw a strong UK employment number yesterday with UK jobless claims falling by their largest amount since 1997. The number of people claiming unemployment benefits fell by 41,700 to 1.35m although the unemployment rate remained at 7.7%. An improved economy brings about improved employment and we are seeing the results of that now following a few months of economic data that has seen the UK performance the best in the G10.

Stronger activity and an increased sense of business confidence, while productivity remains low, should lead to further falls in unemployment in the months to come. Unfortunately, while the fall in jobless claims is great news, the obvious caveat is that wage increases are slowing; people may have a job but, given yesterday’s CPI and RPI release, the wage/price relationship is and will continue to remain onerous, especially for the lower paid.

Following disappointing manufacturing and construction output figures last week, we have the services sector reporting today in the form of retail sales. Analysts are looking for a slight recovery from the surprise 1.0% fall seen last month, to cling on to the hope that a consumer driven recovery is still going strong. The number, due at 09.30, is expected to rise by 0.3%.

Comments from Spencer Dale, the Bank of England Chief Economist, have been seized upon overnight after he seemed to hint at rate rises in 2014. “What we are clear about is what the state of the economy will be like when we raise interest rates. What we are not as clear about is whether that is two years ahead, three years ahead, or one year ahead. But it is clear that we are thinking of years not months,” Dale said. Personally I think these comments commit to nothing.

We also have European construction output (10am) and US jobless claims (13.30) due today.

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Sectors: Capital Markets and Foreign Exchange
Topics: Finance
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