On The First Day Of Shutdown, The Futures Were... Giddy

If there is one day the Fed's trading desk actually did want futures lower, if only for purely optical purposes and to at least suggest that the government, and not the Fed, is still in charge of the US, it is the day when the US government - for the first time in 17 years - has shut down. They certainly did not want the S&P to be up nearly 0.5% mere hours after Congress and the presidency confirmed to the world that in a world in which "the Chairman gets to work", a functioning government is completely irrelevant. Yet this is precisely what is going on. What is making matters worse is that on the other side of the world, Japan also finally announced the well-telegraphed sales tax increase to8%, offset by a JPY5 trillion yen "stimulus" which however Japan said, much to the Chagrin of Mrs. Watanabe and a 100 pip overnight plunge in the USDJPY, would be funded not with more new bond issuance (and thus without new "wealth effect" generating monetization). It is unclear just how it will be funded but since increasingly more global fiscal and monetary policy is based on science fiction we know better than to ask.

As RanSquawk remarked, the euphora from the end of the US government's "reign of terror" spread far and wide, with European equities trading positively in a recovery of yesterday’s losses as participants had previously priced in the possibility of a US government shutdown. The confirmation of the budget gridlock therefore did little to influence sentiment as easing political turmoil this side of the Atlantic provided a lift. The Italian benchmark bourse has led the European recovery after Berlusconi’s rhetoric softened slightly as members of his PdL party threatened to break away. Meanwhile Bunds see weakness ahead of the 10y auction in tomorrow’s session and Spanish supply on Thursday.

This morning has seen USD weakness with CHF the main driver and beneficiary. The pair fell to an 18-month low and broke below the significant 0.9000 level before finding support just below. Similarly the USD-index momentarily fell below the 80 level while EUR/USD rose to highs seen 8-months ago when European banks began repaying LTRO in January.

Despite gains against the USD, EUR is seen lower in its major crosses, as markets remain wary of the single currency ahead of the ECB rate decision tomorrow and the possibility of a new LTRO.

Looking ahead markets major data will be the final PMI and ISM manufacturing data from the US but focus will be on further details of the Republican/Democrat discussions as well as information on potential data release delays from government agencies. We expect the construction spending data due out today at 10 am will not be reported (the ISM will be) and if the shutdown lasts for one more day, all BLS data for the rest of the week will be cancelled to, including Friday's payrolls random number generator.

News bulletin from Bloomberg and RanSquawk:

  • European equities trade positively after Berlusconi's hard line faces opposition from within his own party.
  • Treasuries fall as the U.S. government began its first partial shutdown in 17 years, idling as many as 800,000 federal employees, closing national parks and halting some services after Congress failed to break a partisan deadlock by a midnight deadline.
  • Japanese Prime Minister Shinzo Abe proceeded with an April sales-tax increase and a JPY5t ($51 billion) stimulus plan as he tries to rein in the world’s biggest debt burden without negating efforts to end deflation
  • Italy’s government is on the verge of collapse and two of its most senior executives have lost the confidence of shareholders. Thanks to Mario Draghi’s promises, bond investors see the turmoil as more of a blip than a crisis
  • German unemployment unexpectedly increased for a second month in September, in a sign the recovery in Europe’s     largest economy remains uneven
  • Sovereign yields mostly higher, peripherals spreads tighten. Nikkei gains 0.2%, most Asian and European stocks higher. S&P 500 futures rise. WTI crude, copper lower; gold rises

Asian Headlines

Chinese Manufacturing PMI (Sep) M/M 51.1 Exp. 51.6 (Prev. 51.0)

Japanese Tankan Large Manufacturers Index (Q3) Q/Q 12 vs. Exp. 7 (Prev. 4); highest since December 2007.

Japanese PM Abe said Japan is to raise sales tax to 8% in April as planned and is expected to announce the economic package today. (Newswires) There were also reports that the Japanese cabinet will confirm plans to put together a JPY 5trl supplementary budget, including cash handouts to low-income people. (Nikkei) Moody's vice president Byrne has said a sales tax increase is credit positive, but does not mean an upgrade is imminent. (Newswires)

EU & UK Headlines

UK Manufacturing PMI (Sep) M/M 56.7 vs. Exp. 57.3 (Prev. 57.2, Rev. 57.1)

German Unemployment Change (000's) (Sep) M/M 25K vs. Exp. -5K (Prev. 7K, Rev. to 9K)
German Unemployment Rate (Sep) M/M 6.9% vs. Exp. 6.8% (Prev. 6.8%)

Eurozone Manufacturing PMI (Sep) M/M 51.1 vs. Exp. 51.1 (Prev. 51.1)

German Manufacturing PMI (Sep F) M/M 51.1 vs. Exp. 51.3 (Prev. 51.3)
French Manufacturing PMI (Sep) M/M 49.8 vs. Exp. 49.5 (Prev. 49.5)
Italian Manufacturing PMI (Sep) M/M 50.8 vs. Exp. 51.0 (Prev. 51.3)
Spanish Manufacturing PMI (Sep) M/M 50.7 vs. Prev. 51.1

US Government Shutdown Update:

After failing to break the budget impasse, the US government has partially shutdown for the first time in 17 years. US President Obama said Social Security and Medicare are to continue in the shutdown. Obama added that government office buildings will close and that under the government shutdown, social security cheques will still be sent  House Republicans floated a late-stage offer to break the gridlock, however majority leader Harry Reid rejected the idea, saying the Democrats would not be forced into negotiations 'with a gun to our head'. Reid added that the Senate are to recess until 1430BST/0830CDT today in order to put down the latest House funding plan.

S&P said the debt ceiling debate is unlikely to change S&P's 'AA+' US credit rating, whilst analysts at Goldman Sachs advise entering 3y vs. 30y UST steepener trade on the premise that the bond market hasn't priced in debt ceiling concerns, targeting 340bps and stop on close below 290bps


European equities trade higher despite the news of a US government shutdown, which has had very little effect in the European morning. Moves higher come as a reversal of moves yesterday, as markets suffered losses amid fears of the shutdown yesterday, while confirmation of the shutdown has not resulted in further losses.The FTSE MIB is today's best performing bourse after taking the heaviest losses yesterday as the political tumult in the Italian Senate appears to be easing with Berlusconi's rhetoric softening and the economic measures being prioritised.


Australian RBA Cash Target (Oct 1) 2.50% vs. Exp. 2.50% (Prev. 2.50%) - The RBA said that monetary policy is appropriate and that inflation is consistent with the medium term target. RBA stated that lower AUD would help the economy and added that AUD is still about 10% below its April level despite recent rise.

This assisted USD weakness at the start of European trade with CHF the main driver and beneficiary. The pair fell to an 18-month low and broke below the significant 0.9000 level before finding support just below. Similarly the USD-index momentarily fell below the 80 level while EUR/USD rose to highs seen 8-months ago when European banks began repaying LTRO. Despite gains against the USD, EUR is seen lower in its major crosses, as markets remain wary of the single currency ahead of the ECB rate decision tomorrow and the possibility of a new LTRO.


Gold sees minor upside as it benefits from the weakness in the USD and approaches its 50DMA and 100DMAs at 1349.00 and 1339.84 respectively. Positive trade in European stocks and the absence of traders in China has meant that gains have remained relatively tamed.

According to an EIA Chief, the US government may want to mull exports of SPR crude should there be a global supply emergency. The EIA has enough resources to operate until October 11th in the event of a government shutdown, according to an official. The API have said their weekly inventory figures are to be released today as scheduled.

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We conclude as always, with the thoughts of DB's Jim Reid, reporting today from the Phoenecian:

As we write the US government is shut down for the first time since 1996 and the Italian government sits on the verge of collapse even if the hope is that a new coalition can be formed. In spite of the political turmoil and a mixed China September PMI number (rising to 51.1 vs 51.5 expected) overnight markets held up remarkably well in Asia as the Nikkei rose 0.7%, the Hang Seng stayed broadly flat and Asian credit indices moved marginally tighter. These resilient markets followed on from European and US trading sessions which saw early losses pared back over the course of the day. On to the politics.

The US Congress proved unable to reach an agreement on a continuing resolution to fund the government on Monday as the Senate tabled the House’s Sunday bill which tied government funding to a one-year delay of Obamacare and a repeal of a tax on medical devices. The House again refused to pass the Senate’s “clean” funding bill (which made no amendments to Obamacare) and so all of the non-essential activities of the government are now shut down – this includes around 800,000 staff who are unlikely to be paid. The focus will now move to what will end the government shutdown, with DB’s Frank Kelly expecting a shutdown of 2-5 days as Democrats, moderate Republicans and conservative Republicans read polling on the public’s reaction to the shutdown to see who is winning and losing politically from the impasse. The next few days will likely prove important for this as the US population is forced to come to a decision on whether it likes or dislikes Obamacare – a complex law which is still not widely understood by the US population with a CBS/NYT poll last Wednesday indicating only 20% of the populace feel they know a lot about the law whilst 25% said they knew little or nothing about it. It will be interesting to see how polling comes in over the next few days.

On the more dangerous issue of raising the debt ceiling, which the US is set to hit on October 16th, there is more optimism on getting a deal done. Frank notes that whilst the Republican leadership may have been willing to let their more conservative elements help force the government to shut down they understand that the debt ceiling issue is far more dangerous and so will be willing to take around 90 to 100 more moderate Republicans in the House to vote with the Democrats to raise the debt limit. One last point to highlight on the situation in the US is that none of the bills so far proposed provide a longterm solution to any of the US’s fiscal issues – the Senate bill to fund the government would take it to just November 15th whilst the House bill would take it to December 15th and so further government shutdowns later in 2013 are not to be ruled out.

Moving to the political situation in Italy, the Italian government continues to stand on the brink of collapse as the PM Letta called for a vote of confidenceto be held on Wednesday following the resignation from the coalition cabinet of all 5 ministers from the centre-right PDL. The government has been extremely fragile ever since Berlusconi’s tax fraud conviction which could ultimately see a senate vote on October 20th to expel the former PM fromparliament. DB’s Marco Stringa’s base case is that the government will likely fall after the vote of no confidence on October 2nd. Then a new coalition could be put together by President Napolitano with a limited life time and limited scope which will see it tackle a change in the electoral law and pass a 2014 budget with new elections held in Spring 2014. The alternative scenario is that Italy fails to form a new government which would trigger early elections in late 2013 or early 2014 and polling suggests under current electoral law would return another stalemate in Parliament. Market reaction on Monday was very muted with the Italian 10Y despite opening 24bps wider it eventually ended the day just 1.5 bps wider, with the FTSE MIB down 1.2% on the day. The Italian market was mirrored across Europe in what ended up being remarkably restrained action across European markets Monday with the DAX and FTSE100 down -0.8% and iTraxx Main and Xover closing just 2bps and 7bps wider. With OMT in place perhaps such muted reaction to major European political events is to be expected with greater serious stress requiring a greater chance of either no government or an anti-euro government being formed in nations. The upcoming ruling by the German Constitutional Court on OMT is also an event to watch out for given the Italian risks though a date for this ruling remains vague with expectations simply placing it sometime after Germany has a new government.

US trading on Monday followed along much the same lines as trading in Europe with the S&P500 down -0.9% at the open before rallying back throughout the day to close just -0.6% whilst the same numbers for the NASDAQ were -1.2% at the open but closing just -0.3%. The picture was much the same in US Credit markets with the CDX IG and HY opening notably wider but closing just 1bp and 5bps wider. Markets likely found support from the Chicago September PMI which came in at a consensus beating 55.7 (vs. consensus forecast of 54.3).

Looking to the day ahead we have European PMI’s this morning and from the US we have August construction spending, ISM manufacturing and September unit motor vehicle sales. It will also be interesting to see what political rhetoric comes out of the White House and Congress today as the US wakes up to a shut down government.