Senate plan lays foundations for temporary debt deal

  • Extension of debt ceiling until Feb and government budget until Jan in talks
  • UK inflation should slip to 2.6% briefly
  • German ZEW key this morning before US wakes up

On a day named after a famous explorer it was apt that Columbus Day may have provided the exploratory talks in the US Senate that has made a deal on the US’s continual fiscal issues a little more likely. Any deal has not been finalised, of course, which leaves ample room for disappointment but we remain confident that we will see an agreement before Thursday’s midnight deadline.

The deal as it stands would raise the debt ceiling until around early February based on current spending projections and allow the government to reopen until January. Decisions over longer-term budget and deficit reduction plans would also be folded into the negotiations. Any deal will only be useful if it passes the House of Representatives – home of the harder-line Republicans and Tea Partiers who only match their economic naivety with their self-important bluster.

Movement was slight in currency and bond markets as a result of the slew of public holidays yesterday, but equity markets did enjoy a fillip on the good news. As someone said yesterday “with no bond market there is no intimidation, with no intimidation there is no news”. Intimidation may not be on the agenda as a result of the good news but we are not expecting any great dives or spikes from the overnight’s news.

The one thing that we can fall back on in these circumstances is that we have been down this road before with US politicians and they have, only just, managed to pull the iron out of the fire in time. Comparisons with the European political situation are easy but incorrect; American issues are acute at best while those of Europe undermine the core fabric of the entire political union.

While the US sleeps and Europe opens up we are at least able to look forward to a run of economic data that should inform us as to the latest travails or triumphs of the respective economies, as opposed to simply waiting for someone to sound-off on the Capitol steps.

UK CPI is due at 09.30 and should show a continued decrease in year-on-year inflation to 2.6% from 2.7% previously. The dip in the rate of price increases is exactly what consumers will have been looking for, but they will also hope for an increase in wage settlements, due tomorrow as part of the monthly run of jobs data. You would also expect any slip in the pace of price rises will quickly be forgotten once the anticipated increase in utility bills flows through to consumers in and around November time.

French inflation this morning has shown us a very benign CPI atmosphere in the Eurozone’s second largest economy. Prices actually fell on the month by 0.2% on the EU harmonised scale and will only add emphasis to the idea that the Eurozone is due and needs a rate cut by the ECB, and not another LTRO bank lending operation.

That being said, German data should this morning show an increase in the sentiment surrounding the German economy. The ZEW release on the current situation and expectations for the German economy are both expected to show another increase in sentiment – possibly bolstered by the easy win for Angela Merkel in last month’s election and the continual, albeit slow, improvements in regional data. The number is due at 10am BST.

As it stands at the moment, the uneasy calm on markets will remain as long as progress is made in Washington. For now, we will wait on further movements to anticipate additional market moves.

Topics: Finance
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