Debt Ceiling

While stuff like soaring Bill yields, the threat of Money Market funds breaking the buck, and the gradual phase out of near-term money equivalent collateral thanks to the complete dysfunction in Congress which has managed to breach the repo market into "good" and "bad" Bills, may be too arcane to the various JPY-correlating, ES-ramping algos, those who care about real signals, now that the US flirtation with the X-Date is hours ago may be interested to know that according to ICAP, as reported by Stone McCarthy, overnight General Collateral, the key rate in the determination of collateral pricing for trillions worth of assets, just exploded once again and in following the surge in Bill cash rates, hit 0.32%, the highest since December 7. Indicatively, at 0.32%, GC is now well above both overnight LIBOR (10.69 bps) and the Fed Funds rate (10 bps).

While the specter of the debt ceiling debate continues to haunt the halls of Washington D.C. it is the state of retail sales that investors should be potentially focusing on.  While the latest retail sales figures from the Bureau of Economic Analysis are unavailable due to the government shutdown; we can look at other data sources to derive the trend and direction of consumer spending as we head into the beginning of the biggest shopping periods of the year - Halloween, Thanks Giving (Black Friday) and Christmas. The recent downturns in consumer confidence and spending are likely being exacerbated by the controversy in Washington; but it is clear that the consumer was already feeling the pressure of the surge in interest rates, higher energy and food costs and stagnant wages.  As we have warned in the past - these divergences do not last forever and tend to end very badly.

It's gotten beyond silly: with less than a day to go until the first X-Date, beyond which if Jack Lew is correct (he isn't) all hell will break loose if the US doesn't have a debt deal in place, stocks couldn't care less, Bills continue to sell off, carry traders only care how big the central banks' balance sheets are, all news are generally shunned and yet stocks have soared 600 DJIA points on Harry Reid's relentless optimism a deal will get done, even though so far none has. Today, as we observed on Monday, we expect more of the same: stocks and futures will ignore the reality that the midnight hour will come and go with no deal in place, but will continue to explode higher as Harry Reid's latest set of "optimism" headlines hits the tape in low volume trading. We expect the first big hope rally around POMO time, then shortly after Senate comes back in Session, around noon. Then for good measure, another one just before market close. Why not: it's not like the "market" even pretend to be one anymore. Keep an eye on today's 4-Week bill auction before noon. It should be a far bigger doozy than yesterday's longer-dated bills.

Update: Sure enough, NO HOUSE VOTE TONIGHT ON FISCAL IMPASSE PLAN, LAWMAKER SAYS

In a repeat of the Sequester farce, in which Boehner was unable to even get the needed votes to pass the House Republicans' version of their own bill, the debt ceiling impasse is becoming a sequester sequel deja vu when McConnell and Joe Biden had to hammer out a deal over the impotent political corpse of John Boehner. The reason, as various beltway journalists report, in this case the NRO, that House Republicans are now set to postpone tonight’s vote on their plan to end the fiscal impasse is that "The votes aren’t there," says a leadership aide. "We’ve been amending the bill all day, but we’ve been unable to get people around this strategy." As the NRO's Robert Costa adds, this development leaves Speaker John Boehner with few options as Thursday’s debt-ceiling deadline nears, and it throws the action back toward the Senate, which has been working on a bipartisan package.

So what exactly did Reid know and when?

• *UNITED STATES' AAA IDR RATING MAY BE CUT BY FITCH :3352Z US
• FITCH SAYS PUTS U.S. ON RATING WATCH NEGATIVE AS U.S. AUTHORITIES HAVE NOT RAISED FEDERAL DEBT CEILING IN A "TIMELY MANNER
• *FITCH STILL SEES U.S. DEBT CEILING TO BE RAISED SOON :3352Z US
• *FITCH SEES RESOLVING US RWN BY END OF 1Q '14 AT LATEST
• *FITCH STILL SEES U.S. DEBT CEILING TO BE RAISED SOON :3352Z US
• *FITCH SEES U.S. ECONOMIC GROWTH REVERTING TO 2.25% AFTER 2017

And a surprise encore guest lecture...

Understanding the complexities of the sovereign CDS market is tricky... so we are constantly bemused by the mainstream media's constant comment on it as if they have a clue. The fact is that the USA CDS market is indicating a higher risk of imminent technical default now than in 2011. As we explained in painful detail previously, you cannot compare a 71bps (+8 today) 1Y USA CDS spread to a 1200bps JCPenney CDS spread - they are apples and unicorns. Having got that off our chest, the fact that the cost of 1Y protection is at 2011 extremes (implying around a 6.5% probaility fo default) and has been higher (inverted) relative to 5Y now for 3 weeks is a clear indication that investor anxiety is very high this time (just look at T-Bills!).

The market is rapidly adjusting from imminent default to pricing in the risk of a debt ceiling debacle in February. 10/17 Bills are unchanged, Oct/Nov Bills are improving, but Feb 2014 Bills are now slamming higher in yield +5bps to 9bps for now... How much longer can the powers that be keep the ever inflating balloon under water?

No one and I mean NO ONE would place an order like this. It simply doesn’t happen. Anyone who is trying to unload a position of this size would do it in chunks over a period of time in order to not push the price sharply lower.

It is becoming clear that the House is splitting off from the Senate negotiations (especially after Rep.Paul Ryan's comments that the "Senate Plan is not enough" and as Robert Costa reports, there is a bill emerging that has a little (maybe not enough) for everyone - "CR + DL + med device + income verification + Vitter language." Obama appears to be demanding more concessions in his "unconditional surrender or default" strategy as tells McConnell that Treasury needs flexibility (i.e. as we approach the next debt ceiling deadline - assuming this one is passed - the Treasury should be allowed to tinker with things to keep the ball rolling). Equity markets are growing more nervous - especially in light of the fact that being this close to the edge, a well-meaning politician looking to make a name for him- or her-self could filibuster the US past the X-date with nothing to be done about it. The biggest issue is that with much negotiation and debate obviously left on the table, there is a hard limit in just over 36 hours, a timeframe that is becoming increasingly unfeasible and which implies a breach of the X-Date - if even briefly - is very much possible. What is worse, is that since nothing immediately bad would happen on October 17 with no deal, that the GOP can further protract negotiations in an attempt to force Obama's hand to yield some additional compromise.

For the 3rd time in 3 days, Silver (and gold) have been slammed lower in an almost instantaneous hammer blow, only to be lifted shortly thereafter to fill the apparent foreced sale void. Prices of precious metals have become increasingly volatile intraday in the last week or so as the debt ceiling debacle plays out but this mornings dump-and-pump seemed to sum up the new normal perfectly. Once again, it would seem, the Chinese will be sending thank you letters to the Fed and their henchmen... (as Goldman suggests there will be no Taper until March)

Despite the ongoing antics in Washington the market remains less than 5 points (at the time of this writing) from its all-time closing high.  If the markets were concerned about economics, fundamentals or potential default; stock prices would be significantly lower.  The reality is that as long as the Federal Reserve remains convicted to its accommodative policies the argument for rationality is trumped by the delusions of Mo' Money. We have seen these "Teflon" markets before - do we really need to remind you what happens to a Teflon pan when you finally scratch the surface? In the meantime here are 5 things to ponder as the week progresses...

• Spot the pattern: Senate Leaders Nearing a Deal (Politico), Senators say debt, shutdown deal is near (USA Today), Senate Leaders in Striking Distance of a Deal (WSJ), U.S. senators hint at possible fiscal deal on Tuesday (Reuters), Senate Debt-Limit Deal Emerging (BBG)
• U.S. debt ceiling crisis would start quiet, go downhill fast (Reuters)
• Uneasy Investors Sell Billions in Treasurys (WSJ)
• BOE’s Cunliffe Says U.K. Is Not in Grip of Housing-Market Bubble (BBG)
• Letta Mixes Tax Cut With Rigor in Post-Berlusconi Italian Budget (BBG)
• Japan Seeks to Export More High-End Food  (WSJ)
• Burberry names Bailey CEO as Ahrendts quits for Apple (Reuters)
• China’s Biggest Reserves Jump Since 2011 Shows Inflow (BBG)

If mere hope of an "imminent" deal starting on Thursday and continuing through Monday, with no actual deal but who cares about details, was enough to push the DJIA up by 600 points, then all it would take to set a new record market high today, is for another day to pass - one day before the October 17 X-Date when one Senator can filibuster the US through the deadline on their own, and when the House still has to have a voice on what the Senate has been doing - without an actual debt deal. After all, the market is so "centrally-planned" all that is needed is knowledge that Bernanke will get to work, and is getting to work to the tune of $85 billion a month, mixed in with some hope. And with today's "market for idiots" facilitating POMO of over $5 billion which guarantees a green close, all that is needed is a complete failure in talks for the SPX to go limit up on even more hopes things will be fine any second now... if not right now.

With two days to go to until dreaded October 17 D-Day (on which incidentally, very little of note will happen, because as Goldman explained earlier today, that is simply the date past which the Treasury can no longer borrow, but still has some $30 billion in cash which could last to fund the Treasury's needs as long as the end of the month if not longer) Washington is now openly playing with fire. Because for all the hopeful talk of an imminent deal on Thursday, then on Friday, then today, not only is there nothing substantive on the table, but Obama will not even meet with the Senate, let alone the House, until tomorrow morning. At that point there will be about 36 hours until October 17. But what is worse for all the end is nigh-ers, who are absolutely certain the world will end if Congress crosses the D-Day deadline (which, again, as Goldman said earlier "going slightly past the October 17 deadline is entirely possible") is that as The Hill explains, Senate could still miss the debt deadline, assuming there is a debt deal in the first place. Which is a big if.