Barack Is Back: The 2012 Season Of The Fiscal Cliff Soap Opera Is Finally Concluding
While the market will look with some last trace of hope to Obama's return from Hawaii to D.C. today, the reality is that even the mainstream media, which had so far gotten everything about the cliff spectacularly wrong (proving that sample polling and actual "predicting" are two very different things), is waking up and smelling the coffee. As Politico reports, "nearly all the major players in the fiscal cliff negotiations are starting to agree on one thing: A deal is virtually impossible before the New Year. Unlike the bank bailout in 2008, the tax deal in 2010 and the debt ceiling in 2011, the Senate almost certainly won’t swoop in and help sidestep a potential economic calamity, senior officials in both parties predicted on Wednesday. Hopes of a grand-bargain — to shave trillions of dollars off the deficit by cutting entitlement programs and raising revenue — are shattered. House Republicans already failed to pass their “Plan B” proposal. And now aides and senators say the White House’s smaller, fall-back plan floated last week is a non-starter among Republicans in Senate — much less the House. On top of that, the Treasury Department announced Wednesday that the nation would hit the debt limit on Dec. 31, and would then have to take “extraordinary measures” to avoid exhausting the government’s borrowing limit in the New Year."
Which means Obama must be particularly angry: his return to DC has nothing to do with negotiations, and everything to do with optics, and giving the popular impression that he is hard at leadership work. And what is supremely ironic is that suddenly everyone wants to go over the cliff: a move which incidentally is critically needed in a country which needs to apply some brakes to its runaway spending, where not even the mandatory expenditures (excluding military) could be covered in their entirety by government rax receipts.
Of course, all of this does not matter to the market which, just like the broader media, is incapable of rational thought, and especially not of forecasting, and will be grasping at straws onto any flashing red headline promising a deal is imminent in the 3 remaining trading days of 2012. In the meantime, instead of selling, traders will continue buying near-term puts, and sending the VIX ever higher because, as we noted last week, the fear is that once one starts selling, everyone starts selling, and nobody knows just how far the selling goes in a market as illiquid and broken as this one.
In this regard, watch out around 2:30 pm Eastern when House Republicans will hold a conference call to discuss next steps in the fiscal cliff stalemate. There will be many market moving headlines then.
In terms of actuall irrelevant newsflow, Italy sold some €11.75 billion in Bonds and Bills at a slighlty higher yield in its first debt auction to be settled in 2013. The treasury issued the targeted 8.5 billion euros of six-month bills, paying a yield of 0.949 percent, slightly up from 0.919 percent at a similar auction one month ago. Rome also sold 3.25 billion euros of two-year zero-coupon bonds at a yield of 1.884 percent, down from 1.923 percent in November. The tremors sent the yield on the benchmark 10 year BTP to a 10 day high. Is this merely the precursor of Italy taking the center bond stage in Europe in 2013: sit back in your easy chair and find out very soon.
Elsewhere, the Shanghai Composite did not share the enthusiasm of the Nikkei which is following the plunging Yen ever higher (but remaining flat in dollar terms), and posted its first red close in days, closing 0.6% lower as it flirts with the unchanged for the year level.
In far more important news out of China, we learned that the country plans to increase its budget deficit by a whopping 50% to 1.2 trillion yuan ($192b) in 2013, including sale of 350b yuan of bonds to fund local governments, a person familiar with matter tells Bloomberg News. Central government deficit is budgeted at 850 billion yuan, according to the person. Govt targets about 8% trade growth, down from this year’s 10% goal. So is China now becoming the US and joining every other country in the world in posting a whopping budget deficit? With all signs pointing to yes, one wonders: who in this world has a budget surplus left?
Yet all the above news is as always irrelevant: the only thing that matters is how the market, and the permawrong pundits spin any word coming out of Obama and Boehner, and how it digests the realization that it is increasingly likely that nothing at all will happen - as we have been saying for over 2 months - until the actual debt ceiling D-day deadline, some time in March.
More from DB's Jim Reid
Just five days to go until the year-end and the moment in which the US will reach its $16.4 trillion debt ceiling. According to a written warning from Tim Geithner to the Congress that was released after US market close overnight, the government will hit the debt ceiling this coming Monday and the Treasury will soon begin to take a series of “extraordinary measures” to create $200bn in debt ceiling headroom. According to CNN such measures include suspending the reinvestment of federal workers’ retirement account contributions in short-term government bonds. The headroom aims to buy the government approximately two months of time before it faces “default on its legal obligations” unless the ceiling is raised prior to that.
To briefly summarise the fiscal cliff discourse over the last week or so, we’ve gone from a “grand bargain” including a proposed extension of the debt ceiling debate for two more years, to Boehner’s Plan B which was abandoned before a House vote, followed by Obama’s fallback plan, and now reports of Senate Majority Leader Harry Reid’s so-called Plan C.
Reid’s plan, which is being described as a “stop-gap” measure, aims to extend tax rates for incomes up to $250k, limits tax deductions, sets the dividend/capital gains tax rate at 20% and delay across-the-board spending cuts until early in the New Year when Congress will again need to negotiate an increase in the debt ceiling (NY Times). It comes after Boehner insisted on Wednesday that “lines of communication remain open” but held firm that the Senate must make the next move.
So with the Senate reconvening today and President Obama returning to Washington from his Christmas vacation in Hawaii, all eyes will be on whether Harry Reid can broker a deal with the GOP to pass last-minute legislation that could then be brought to the House later in the week. House leaders have told lawmakers that they would receive a 48-hour notice before being called back to Washington. According to the NY Times, House leaders haven’t yet given that notice and are still discussing the schedule, so as we stand it appears that the earliest the House could reconvene would be Saturday if the 48-hour notice stands to be true. On that note, DB’s Head of Government Affairs, Frank Kelly, is hosting a daily conference call this week providing updates on the Fiscal Cliff. Details are provided at the end of today’s EMR for those interested.
Turning to markets now and the S&P 500 closed 0.48% lower yesterday led by Retailers (-1.27%) on reports of sluggish holiday season sales. The WSJ reported that US holiday retail sales grew at 0.7%yoy, the weakest pace since 2008, citing data from Mastercard. However, CNBC noted that the survey period included the week of Hurricane Sandy which explains some of the weakness in sales. In other data, the Case-Shiller October reading confirmed the continuing upward trend in house prices with the 20-city index up 0.66% mom (vs 0.48% expected) but this positive print was largely outweighed by the concerns over the looming fiscal cliff deadline. The VIX jumped another 4.8% on Wednesday to close at a 5-month high, bringing the total rise over the last 5 sessions to 25%.
As a reflection of the risk-off sentiment, 10yr UST yields edged 2bps lower to 1.751% while Gold rose marginally by 0.1% for its fourth gain in as many sessions.
In overnight markets, most Asian bourses are trading higher led by gains on the Nikkei (+1.0%) and Hang Seng (+0.42%). In Japan, Mr. Abe officially took office as the PM on Wednesday and was quick to reiterate his policy of pushing for “bold monetary easing” and “flexible” fiscal policy. Abe also named key members of his cabinet which included Taro Aso as finance minister. As Prime Minister in 2008-2009, Aso oversaw a JPY14 trillion stimulus package which was the largest Japanese spending plan on record (Nikkei). The JPY continued to slide against major currencies on Wednesday. USDJPY gained 1% on Wednesday and is consolidating at 85.80 overnight, its highest level since September 2010.
The other big mover of late in Asian markets has been onshore Chinese equities which have rallied 13% since the multi-year trough reached on 3rd December, or approximately two weeks after China’s new leaders were appointed. Following solid gains over Christmas, the Shanghai Composite has managed to claw back into positive territory for the year-to-date (+0.7%) although it still remains the worst-performing major equity index in Asia.
In European headlines, caretaker Italian PM Monti tweeted on Christmas night that “Together we have saved Italy from disaster. Now we have to renew politics…Let rise to politics!” which some saw as a strong indication of Monti’s intention to run in the next elections. Monti also published his pro-European political manifesto, titled “Change Italy. Reform Europe”, which drew endorsements from a number of centrist parties including Pier Ferdinando Casini’s Catholic UDC. According to the FT, Monti will meet with prospective coalition partners on Thursday to discuss strategy and candidate lists amidst reports of a likely Centrist-Democrats coalition heading into next year’s election (FT).
Looking at the day ahead, major European markets will reopen today after the Christmas/Boxing Day break. In Europe, the data flow will remain thin with French jobseekers and Italian business confidence the main highlights. In the US, the House Republicans will hold a conference call at 2:30pm USEST to discuss next steps in the fiscal cliff stalemate. In terms of US data, consumer confidence, jobless claims and new home sales are the major data points – although the next few days of data will likely be overshadowed by developments in Washington.