US budget deal lowers US political, fiscal risk around tapering argument

• Deal between House and Senate budget committee chairs the first step
• UK manufacturing production higher, German inflation as expected
• Aussie consumer confidence slips to pre-election levels

We never get to report on positive political news from the US anymore. It seems that an extension of the status quo via ongoing continuing resolutions and avoiding shutdowns was the best we would get for a while. Last night however, we saw a slight glimmer of light open in the new budget negotiation dealings. The head of the both the Senate and House budget committees – the lead negotiators on this matter – came to an agreement yesterday night on a deal that would retarget cuts made as part of the “sequestration” package.

Those spending cuts are lessened by $63bn over the course of the next two years and come without any additional tax rises and an estimated $23bn of deficit reduction over the course of the next 10 years. This should pass both houses, but more importantly the Republican controlled House of Representatives, without much issue.

Away from the politics however, there is obvious good news here for the Federal Reserve. A large part of the Fed’s reticence to taper its asset purchases were the fears that Washington would indeed drive budget negotiations over a cliff and the government into shutdown – which proved correct – and that spending cuts and deficit reduction was having a large fiscal drag on the US economy. The deal pushes budget negotiations out to 2015 and although we still have a debt ceiling battle to deal with, the market will view this political development as a further box ticked on the path to a vote for asset purchase reduction. The FOMC meeting is next Wednesday.

Dollar strengthened on the news but remains at weak levels following 4 consecutive days of losses.

Sterling pushed on slightly yesterday following another strong industrial survey. UK industrial production data showed that momentum continued into the 4th quarter with November growth 3.2% higher compared to this time last year – the fastest growth since January 2011. The numbers would have been higher had it not have been for falls in oil and gas extraction measures that declined as a result of issues at a North Sea oil terminal and within a gas pipeline in the same area.

Manufacturing PMIs and other surveys have remained strong into the close of 2013 and should contribute to an increase in sector employment in 2014. Rebalancing of the UK economy is still way off though and risks to the manufacturing sector remain from falls in export demand, due to increased economic pressures in the Eurozone and the continual and persistent rise in GBP against its trade partners.

Consumer confidence in Australia has regained levels seen pre-election according to the latest round of data. Unfortunately they are the lows as the boost provided by the election and recent upward movements in house prices. Accompanying data that gauges respondents’ attitudes to the labour market was also poor with pollsters predicting further unease in the jobs market into 2014. AUD is the weakest G10 currency as we open up this morning.

German inflation has matched expectations this morning of increasing by 0.2% on the month and 1.3% year on year. There has been limited euro movements in the aftermath and once again the calendar is very quiet today with currencies likely to remain range bound we would expect.

Have a great day.