The Overnight Report: Shutdown Looms

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By Greg Peel

The Dow closed down 66 points or 0.4% while the S&P lost 0.3% to 1697 and the Nasdaq was flat.

It was another very quiet day of little consequence on Bridge Street yesterday, with the ASX 200 falling on Wall Street’s lead and remaining down around the minus 20 mark all session. School holidays in NSW are adding to the lack of interest in a week devoid of local data with only a handful of profit reports offering any excitement.

Bridge Street is in waiting mode to see what happens next on Wall Street, and Wall Street is in waiting mode. October tapering appears unlikely, based on the data, with December now the preferred bet (there is no November meeting in the six-week FOMC cycle). But before we get to tapering we must first get through the US fiscal budget negotiations and then the debt ceiling negotiations.

Remember our old mate Fiscal Cliff? What a dud he turned out to be. But it was about this time last year we started talking about him. The year before that, the Republicans had just regained the House in the mid-terms and the Tea Party asylum had hit its peak of influence. There followed a budget stand-off, with the Republicans threatening to block the budget bill unless drastic cuts were made, thus raising the possibility of a government shutdown, just because they could.

They didn’t of course, and a “can down the road” agreement was reached at five minutes to midnight. But not before the US lost its AAA rating with S&P.

So get out the broken record, we’re back here again. The new fiscal year begins October first in the US so the countdown’s on, with neither party showing any sign of compromise. In the frame is Obamacare, much despised by a Tea Party now stripped of earlier credibility. But while Americans are closely split on their Obamacare views, they are very much against a government shutdown to make the point, polls suggest. The Republicans’ power is not quite as potent as it was.

Either way, many observers are already prepared to shrug off the negotiations as yet another charade to be played out publicly before another last minute compromise is reached. That has been the way of things up to now. But still there are those suggesting this time a compromise may be untenable. We can only wait.

We can probably now at least fully discount the Middle East risk premium, with President Obama telling the UN General Assembly last night the US is committed to finding diplomatic solutions for both the Syrian civil war and the dispute over Iran’s nuclear program.

Moving from fiscal back to monetary considerations, last night brought a raft of US economic data.

The Conference Board’s measure of consumer confidence showed a fall to 79.7 from 81.8 last month, with economists expecting 79.5. Not quite so close to the money was the Richmond Fed manufacturing index, which crashed to zero from last month’s plus 14 – much worse than expected.

The Case-Shiller 20-city house price index showed a gain of 1.8% in July, which was the weakest monthly gain since March. This suggests the pace of the US housing recovery may be easing, although the 12.4% year on year growth rate is still the fastest since 2006. The FHFA house price index (Fannie/Freddie mortgages) increased by 1.0% to mark eighteen successive monthly gains, for a year on year rate of 8.8%.

The data is mixed, suggesting no tapering just yet, although the US jobs number due at the end of next week is the biggie.

In Germany, the IFO business sentiment survey showed a tick up 107.7 from 107.6 although economists were expecting a bit more.

The US dollar index crept up 0.2% last night to 80.59 and the Aussie has slipped 0.4% to US$0.9393. Gold is steady at US$1322.50/oz. There is movement in US bonds however, ahead of next week's shenanigans, with the ten-year yield down a further 6bps to 2.65%.

Base metals rather threw in the towel last night and all fell around 1% ahead of any new development. The oils were mixed, with Brent up US48c to US$108.64/bbl and West Texas down US24c to US$103.35/oz.

Spot iron ore rose US30c to US$132.70/t.

It promises to be another dull day on Bridge Street today, with the SPI Overnight down 3 points. We do, nevertheless, have David Jones ((DJS)) reporting full-year earnings, along with Nufarm ((NUF)). Maybe the release of the RBA’s Financial Stability Review could raise some eyebrows.

Rudi will appear on Sky Business at 5.30pm.
 

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