High noon: fiscal stand-off threatens US government shutdown

Wrap up - last week

High noon: fiscal stand-off threatens US government shutdown

• Global equities suffered while investors sought safe havens as the political stand-off at Capitol Hill threatened a US government shutdown. Congress has just hours to resolve its differences about the budget for the new fiscal year, which begins on 1 October. US economic news failed to provide much impetus. S&P/Case-Shiller’s Home Price Index rose 0.6% in July (seasonally adjusted) below forecasts for an 0.8% gain, while pending home sales fell more than expected in August. News that US second quarter (Q2) gross domestic product (GDP) growth was unrevised from its prior estimate (2.5% annualised) disappointed economists hoping for a stronger figure. One bright spot, however, was initial claims for unemployment benefits, which dropped to 305,000 in the prior week; the four-week moving average fell to lows not seen since 2007. In commodities, Brent crude oil prices weakened after the US and Russia agreed a draft resolution aimed at removing Syria’s chemical weapons.
• Italy also grappled with political challenges, which drove up borrowing costs in its bond market. Italian Prime Minister Letta called a crisis meeting with President Napolitano after the centre-right party threatened to pull out of the coalition government. Economic releases across Europe were more welcome, as Markit's Flash Composite Purchasing Managers' Index (PMI) jumped to 52.1 in September, its highest level since June 2011. Additionally, the Office for National Statistics confirmed the UK economy had grown 0.7% in Q2 quarter-on-quarter and upgraded Q1 growth from 0.3% to 0.4%. Sterling strengthened after Bank of England Governor Carney said that he does not currently see a case for additional quantitative easing. In Asia, speculation that the Chinese government might accelerate property tax trials played off against optimism about the opening of the Shanghai free trade zone.

Shaping the markets – this week

A fistful of dollars: US jobs data in focus as budget showdown continues

• Although political events look set to dominate this week, investors will also have plenty of data to scrutinise. US labour market data will reignite questions about when the Federal Reserve is likely to taper its asset purchases. The ADP Employment report on Wednesday is expected to show an increase in private payrolls of 175,000 in September, slightly higher than the 6-month moving average of 164,000. It is hoped that the four-week moving average of weekly initial jobless claims data (Thursday) will continue to trend lower. But the main event is undoubtedly Friday’s Employment Report. Analysts anticipate that September non-farm payrolls numbers could trump August’s reading of 169,000, and that the unemployment rate will hold steady at 7.3%. Other US releases of note include September’s Institute for Supply Management’s Manufacturing Survey and August’s construction spending report (both Tuesday).

• In contrast, the UK will see a relatively lighter week; September PMIs on manufacturing (Tuesday), construction (Wednesday) and services (Thursday) aren’t expected to have moved much from August’s high levels. The euro area has the potential to surprise, however, with the European Central Bank’s policy decision due on Wednesday. Although no change to the main interest rate is likely, ECB President Draghi recently stirred up market expectations that he may be considering a new LTRO (longer-term refinancing operation) to help facilitate inter-bank lending in the currency bloc. Further afield, Chinese investors will have to watch from the sidelines when markets close for the Golden Week holiday (from Tuesday). This morning’s HSBC manufacturing survey was mildly below forecasts at 50.2 in September. Central bank policy decisions are scheduled in Australia (Tuesday) and Japan (Friday) – but again no changes to policy are expected by analysts.