The Cliff Is Dead, Long Live The Cliff: Futures Soar
And so after much pomp and posturing over the past 48 hours, much of which will likely reshape the layout of the GOP in both chambers, both the Senate and the House passed the first concurrent tax hike and permanent tax cuts in about two decades. The net result of this will be a roughly 1% drag on GDP, even as the US budget deficit increases relative to the CBO's old baseline, and the beneficial impact from the tax hikes offsets roughly two weeks of spending. In other words, while addressing the tax part of the equation, politicians delayed the spending part of the problem for exactly 60 days by punting on the expiration of the sequester, or the government spending cuts. They also delayed addressing the debt ceiling, perhaps the most integral part of the Fiscal Cliff, which has now been breached and which as of this moment means the US can't incur one additional dollar in additional debt.
So looking forward it means the US now has about 4 separate cliffs: the debt ceiling cliff in February/March, the sequester cliff in March, the farm bill cliff in September and the expiration of jobless benefits on December.But that's all in the future, and it will all be a function of just how quickly the GOP rolls over to once again confirm that when it comes to the stock market, America has just one political party. The party of up at all costs, which in turn is manifested right now in the first futures print of the New Year, with both the S&P and the DJIA futures up nearly 2%, and with the E-Mini up some 50 points, or half a turn of S&P multiple expansion in two trading sessions: a nice rally to show just who Washington truly works for.
From a big picture perspective it means one thing: the Fiscal Cliff discussions aren't going anywhere, and will continue to dominate the airwaves over the next two months, only this time far more attention will be paid to the debt ceiling part of the cliff, an issue Obama said last night he will not yield to republicans, and on which republicans said they will demand far more concessions.
In peripheral news flow, corporate revenues and earnings continue to grow below trend, and economic growth will certainly be impacted adversely as none of the uncertainty has been removed, but merely delayed. European final manufacturing PMI declined from 46.3 to 46.1, even as the UK soared ahead of Mark Carney taking the helm of the BOE. Peripheral European bonds continued their declining, with Spain and Italy reaching nearly 2 and 3 year yield lows, respectively.
That said the main mission has been accomplished: all relevant newsflow has once again been pushed back from the main news stream and relegated to the backburner, where anything not meeting expectations can be "explained away" using the Cliff as a scapegoat for both Q4 2012 and Q1 2013.
In terms of actual expected US data today, we have the Manufacturing PMI at 8:58 am, Construction spending at 10 am (expected to drop from 1.4% to 0.4%) when the latest Manufacturing ISM is also released and is expected to rise from 49.5 to 51.5, and finally the December FOMC minutes at 2:00 pm.
Some more on what to expect today from SocGen:
A last minute deal saved the US from going over the fiscal cliff means that the start of the new year is being greeted by a 'risk on' boost to cross assets. JPY funded risk positions have been bid up causing USD/JPY to vault 87.00 and EUR/JPY to set sights on 116.00. Long-term core bond yields and swaps have backed up in the process and a round of decent US ISM data today and payrolls on Friday could cause the correction to deepen in 10y and 30y sectors in particular with yield curves steepening in the process. A break of 1,450 for the S&P-500 could presage a move back up to the September'12 high of 1,474. However, critics were quick to pour cold water on the US fiscal Bill, and the lopsided nature of the deal that focuses on tax increases and is devoid of any commitment to cut public spending will cause tense negotiations to resume over the weeks ahead as the focus now shifts on how to raise the $16.4trn debt ceiling by March. The CBO calculates that the latest agreement will add $4trn to the US deficit. Nevertheless, the negative short-term impact on the economy (and sentiment) appears to have been contained as we now wait for the Bill to be signed into law. In the meantime, we suspect that shorting JPY will continue to be popular as PM Abe takes the reins. Data today includes EU and UK manufacturing PMIs and the US ISM. Germany sells 5bn in 2y notes.
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