As reported previously, the latest meme surrounding the D.C. impasse is that Obama is suddenly willing to compromise on a short-term, supposedly six-week funding and debt ceiling extension, on the verge of his latest talks with republicans at the White House scheduled for this morning, as previously floated by the GOP [31]. Throw some additional headlines such as "Ryan steps up to shape a deal [32]" (in line with what we predicted yesterday [33]) and "The ice breaks; fiscal talks set [34]", by The Hill, and "GOP quietly backing away from Obamacare [35]" from Politico, and one can see why futures are in breakneck soaring mode this morning, driven as usual by the two main JPY cross (USD and AUD), the first of which is less than 100 pips now away from being Stolpered out.
Confirming this view, in recapping the events in DC, DB's Jim Reid says there has been growing optimism over the last 12 hours that we may get a deal which will see a short-term increase in the debt ceiling. House Republicans haven’t yet decided how long an extension they would support and whether it will include any policy conditions. However Republican Paul Ryan, chairman of the House Budget Committee, outlined a plan yesterday to fellow conservatives to extend the debt limit for 4-6 weeks, paired with a framework for broader deficit-reduction talks. The greater the spending reduction the talks produced, the longer the next extension of the debt ceiling would be under Mr. Ryan's plan (WSJ). House Republicans are scheduled to meet at 10am today (local time) to discuss the proposals further and a small team of negotiators are due to meet with the president as well. The White House said the session isn't designed to be a negotiation, but the meeting may allow House Republicans to say they had a policy conversation with the president, which they have been saying is a condition of resolving the stalemate.
In the Senate, Democrats are reportedly open to a short term increase in the debt ceiling, but on the condition that any subsequent debt limit increase wouldn’t require agreement on healthcare policy, namely Obamacare. One can’t help thinking that a short-term agreement would only be a mildly constructive outcome, placing markets in limbo for several more weeks. Meanwhile the latest Gallup poll suggests that Democrats may be gaining the upper hand in the public relations game. The poll found that the favourability of the Republican Party has fallen to 28% (from 38% in September), which is the lowest reading since late 1998 when the Republicans voted to impeach Bill Clinton. The rating for Democrats stands at 43%, down a few points on the month.
So will a compromise deal finally emerge 7 days ahead of the first X-Date, or will a last minute snag once again derail the (non)-negotiations? We will know quite soon.
Market Re-Cap
In Early European trade equities are seen up across the board following positive sentiment stemming from reports from a congressional aide in the US that House Republican leaders are said to weigh a short-term debt measures and Democrats from the Senate are reportedly open to the idea of a short-term debt-cap bill. In terms of the best performing indices for the session the IBEX 35 and FTSE MIB lead the way with financials being the best performing sector amid the positive tone.
Looking ahead for the rest of the session there is the announcement of the BoE rate decision and APF Target, from the US we have release of US Initial Jobless and Continuing Claims and a US 30yr bond auction. Do note that due to the shutdown both import price data and the monthly budget statement have been postponed. We also have speeches from the ECB’s Draghi, the BOJ’s Kuroda, Fed’s Bullard, Tarullo and Williams
Overnight bulletin from Bloomberg and RanSquawk
- Late yesterday it was reported that House Republican leaders said to weigh a short-term debt measure while Senate Democrats are said to be open to a short-term debt-cap bill, according to a Congressional aide.
- USD outperforms most G-10 currencies as Republicans and Democrats showed openness to embracing a short-term deal to avoid default; GBP/USD stays offered before BOE rate decision/asset purchase target at 7:00am New York time; preview here
- The US Treasury and Fed are creating contingency plans should the US enter default, according to sources.
- Treasury Sec. Jack Lew testifies at 8am before Senate Finance Committee on debt limit
- Germany’s Greens are approaching today’s meeting with Chancellor Angela Merkel and her bloc looking for an excuse to abandon talks before they’ve begun
- Norwegian krone falls after Sept. inflation unexpectedly decelerates to 1.7% y/y vs median est. 2.2%; SEK slid against most G-10 counterparts after Sept. CPI and August industrial production also fell sort of estimates est.
- Draghi says critics of EUR underestimated region’s political commitment to the single currency; majority of economists in survey say next monetary policy move will be to unveil new liquidity measures rather than cut rates
- ECB and PBOC agree to establish a bilateral currency swap line, valid for 3 years with a maximum size of 350b yuan and EU45b
- Aussie fell after Australia Sept. employment change disappointed, 9.1K vs est. 15K; AUD/USD reached session low 0.9389 amid leverage accounts sell orders triggering stops, bounces during European session
- Japanese investors sold net JPY2.2t in overseas bonds in the week through Oct. 4, most since April 2001
- KRW rose against all major counterparts after South Korea’s central bank left its benchmark rate unchanged, as expected cut 2014 growth forecast to 3.8% from 4%; benchmark rate unchanged, as expected
- BoE October rate decision due at 1200BST/0600CDT, all analysts surveyed expect the Bank of England to keep the bank rate unchanged at 0.50% and the Asset Purchase Facility unchanged at GBP 375bln.
Asian Headlines
Chinese Premier Li said GDP expected to stay above 7.5% in first 3 quarters. Premier Li also said China is ready to explore signing ASEAN cooperation treaty.
IMF's Shinohara said it is difficult for the BoJ to achieve inflation target by 2015 and that Abenomics should boost JPY's value if successful.
EU & UK Headlines
Even though Eurodollar and Euribor curve have bull flattened in reaction to reports late yesterday that House Republican leaders said to weigh a short-term debt measure while Senate Democrats are said to be open to a short-term debt-cap bill, yields on US 3-Month T-Bills remained elevated.
Nevertheless, other credit market indicators such as USD FRA/OIS rate, signal that despite elevated yields, funding markets continue to operate normally.
French Industrial Production (Aug) M/M 0.2% vs. Exp. 0.6% (Prev. -0.6%)
French Manufacturing Production (Aug) M/M 0.3% vs. Exp. 0.6% (Prev. -0.7%, Rev. to -0.8%)
ECB's Draghi said US critics are wrong to predict Euro bond will fail and that critics underestimated Europe's commitment to the union.
US Headlines
As a reminder, late yesterday it was reported that House Republican leaders said to weigh a short-term debt measure while Senate Democrats are said to be open to a short-term debt-cap bill, according to a Congressional aide. The aide added that there was no decision on attaching conditions and Senate Democrats are said to not want budget deal as a condition.
The US Treasury and Fed are creating contingency plans should the US enter default, according to sources.
Officials are examining what options may be available to calm financial markets should a debt payment be missed.
Of note, Fidelity Investments, the largest manager of money market funds in the US, has said it no longer holds any debt that matures around the debt ceiling deadline.
Japan's Kokusai Asset says not expecting US Treasuries to default, haven't sold US bonds in its USD 14bln fund This morning it was reported that Hong Kong raised haircut on US T-Bills for margin cover.
Equities
Stocks traded higher in Europe, with tech and financials leading the move higher, as credit spreads tightened amid optimism that lawmakers in the US will finally break the stalemate to end the government shutdown.
The resurgence in risk appetite saw the Spanish IBEX-35 and Italian FTSE-MIB outperform their European counterparts, with smaller banking stocks posting gains of around 4%. Of note, after coming under selling pressure over the past couple of days following an announcement that it plans to cut 14% of its total workforce, which in turn prompted government officials to voice their concerns, Alcatel Lucent shares rebounded sharply and gained 3.5% amid touted bargain hunting.
After the closing bell on Wall Street yesterday, Chevron said that Q3 earnings expected to be lower than Q2. Co. shares down 1.6% in after-market hours.
FX
Despite the fact that default risk as indicated that 5y CDS rates declined in reaction to reports that US House of Representatives Republicans are considering signing on to a short-term increase in the government's borrowing authority to buy time for negotiations on broader policy measures, USTs remained under pressure, in turn supporting USD/JPY (interest rate differential flows) which matched October 3rd highs.Broad based EUR strength, which also saw EUR/GBP top the 21DMA line, ensured that even though GBP OIS rates traded higher ahead of the BoE policy rate announcement due at 1200BST/0600CDT, GBP/USD is seen little changed and in close to an intraday option expiry level at 1.5950.
The Brazilian Central Bank hiked the SELIC Rate to 9.50% from 9.00%, alongside expectations.
Commodities
Gold sales under the Central Bank Gold Agreement in the year to Sept. 26 were the lowest of any year since the first version of the pact came into force in 1999, data from the World Gold Council showed.
India's commerce ministry said gold imports by India tumbled last month after the world's biggest user restricted shipments and increased taxes.
Chinese September oil imports are likely to show an increase as refineries return to production after maintenance.
Chevron warns on Q3 earnings after refining earnings drop with the average output for July and August at 651,000bpd vs. 659,000 in Q2.
Freeport sees 2014 copper sales up nearly 10%.
Libya PM Al Zaidan has been taken by armed men from a revolutionary group, according to officials. However, reports made later by Libyan officials said that the PM is in good health and is being treated.
* * *
Deutsche's Jim Reid concludes the overnight recap
The initial reaction to the FOMC’s September meeting minutes suggested that markets had taken it to be a little more hawkish than expected. Indeed, in the moments immediately following the release, T-notes moved a few ticks lower, the USD index spiked 0.2% and gold fell about 0.4%. This was perhaps a kneejerk reaction to the text that said most participants judged that it would be appropriate to begin reducing the pace of asset purchases this year and to conclude QE in the middle of 2014. This hawkish interpretation was quickly pared back though, with some pointing to the more dovish elements of the minutes including signs that the Fed was concerned about the increase in rates on housing and its view of the “considerable risks surrounding fiscal policy”. On the flip side there were also some concerns that a delay in tapering could have significant implications for the effectiveness of Committee communications and commitment to forward guidance. Other than that, they confirmed to some extent that the September taper/no taper call was relatively close, but added little else. And it’s fair to say that the events in Washington of late have superseded the relevance of these minutes to some extent.
A big focus today will be on Treasury Secretary Jack Lew’s appearance before the Senate Finance Committee at 8.30am (ET). DB’s Joe LaVorgna notes that Lew’s initial October 17th Debt Ceiling date is a “soft” deadline. He argues it’s conceivable the Treasury could get to the end of the month before requiring a debt ceiling increase, however it wouldn’t be able to operate past October 31st because the Treasury needs to make a large (estimated at $24bn) Social Security payment on November 1st. The discussion will also likely cover what strategies the Treasury might employ to avoid a technical default if these “harder” dates are overrun. Overall we would expect his testimony to balance forcing politicians into a compromise while trying not to give the markets too many jitters that may be counterproductive medium-term. A difficult balance as we might need more of a market fright to accelerate us towards a long or short-term budget agreement.
Recapping the events in DC, there has been growing optimism over the last 12 hours that we may get a deal which will see a short-term increase in the debt ceiling. House Republicans haven’t yet decided how long an extension they would support and whether it will include any policy conditions. However Republican Paul Ryan, chairman of the House Budget Committee, outlined a plan yesterday to fellow conservatives to extend the debt limit for 4-6 weeks, paired with a framework for broader deficit-reduction talks. The greater the spending reduction the talks produced, the longer the next extension of the debt ceiling would be under Mr. Ryan's plan (WSJ). House Republicans are scheduled to meet at 10am today (local time) to discuss the proposals further and a small team of negotiators are due to meet with the president as well. The White House said the session isn't designed to be a negotiation, but the meeting may allow House Republicans to say they had a policy conversation with the president, which they have been saying is a condition of resolving the stalemate.
In the Senate, Democrats are reportedly open to a short term increase in the debt ceiling, but on the condition that any subsequent debt limit increase wouldn’t require agreement on healthcare policy, namely Obamacare. One can’t help thinking that a short-term agreement would only be a mildly constructive outcome, placing markets in limbo for several more weeks. Meanwhile the latest Gallup poll suggests that Democrats may be gaining the upper hand in the public relations game. The poll found that the favourability of the Republican Party has fallen to 28% (from 38% in September), which is the lowest reading since late 1998 when the Republicans voted to impeach Bill Clinton. The rating for Democrats stands at 43%, down a few points on the month.
Asian markets initially traded firmer on the back of the short term compromise debt limit extension reports. That sentiment has also helped the S&P 500 futures gain 0.4% this morning (to 1656). Sentiment is mixed across the region though with the Hang Seng (-0.8%) and Hang Seng China Enterprises index (- 1.1%) seeing sharp drops in morning trading. There has been market chatter of a small number of large sell orders on Hang Seng futures driving markets lower. Against this backdrop, the TOPIX is firmer (+0.7%) after machine order numbers for August were better than expected (5.4% MoM vs 2.5% expected).
USDJPY is up 0.4% to 97.8. Asian credit spreads are unchanged to a touch tighter overnight following an impressive week so far of primary issuance. Elsewhere as we type there are unconfirmed reports that the Libyan PM has been taken by armed men which is causing a slight spike in Brent (+0.2%). Pockets of market stress remain in the short term money market and there’s been a lot of focus on the T-bill maturing on October 17th (i.e. the date in which Treasury Lew says that the US will hit the debt ceiling). The October 17th bill increased in yield by 20bp yesterday to just under 0.5% and this wasn’t helped by reports that the largest money market fund manager in the US no longer holds any T-bills that mature in late October or early November (Associated Press). The FT added weight to those concerns saying that one or two repo dealers are now avoiding certain T-bills maturing in the next month as collateral for transactions.
In the longer end of the curve, 10yr yields added 3bp to 2.66% with yields trending upwards in the latter half of the US session as equities gained momentum. Indeed, the S&P 500 rebounded from an early low of -0.55% to close at +0.06% for the day. There was very little on the data front except for German industrial production which rose by 1.4% mom in August (consensus +1.0%), reversing the 1.1% decline in July. UK industrial production fell 1.1% in July vs expectations of +0.4%. While the US data blackout accumulates, an ex-Commissioner for the Bureau of Labor Statistics warned yesterday that the integrity of employment data could be compromised the longer the shutdown drags on. Workers at the Census Bureau this month would normally begin canvassing households, starting on Oct. 13, to ask people if they were employed during the previous week. The ex-commissioner commented that “If you collect the information too late, you know the information is not going to be reliable”.
Looking at the day ahead, US Treasury Secretary Jack Lew will testify before the Senate Finance Committee on the debt limit at 8.30 am local time, or around 1.30pm London. The discourse between the White House and House Republicans will be closely watched today for any sign that they are heading to a short term compromise, or otherwise. French and Italian production numbers for August are the main data releases today in Europe. Across the Atlantic initial jobless claims will be released today.