Washington Update: The rhetoric escalated a bit over the weekend, and Boehner said there are not the votes to pass a “clean” CR or debt ceiling debate without first having a “serious conversation” about what’s driving the debt. That comment is responsible for the weakness in risk assets this morning. Democrats re-affirmed their stance that they will not negotiate on the CR or debt ceiling.
From a market standpoint, despite the escalation, the very widely held expectation is that a deal will get done, and the market views the fact that the CR and debt ceiling are now one negotiation as a positive. Most expect some sort of resolution later this week (CNN reported a six-week CR and debt-ceiling deal is gaining momentum), although if we go into another weekend with no progress, expect the anxiety level to creep higher. For now though, we can expect a continuous stream of headlines as both sides posture and continue with their respective PR campaigns.
Away from Washington, there are several other important things going on. First, earnings season kicks off this week with AA and YUM posting results Tuesday after the close, but the big releases of the week will be bank earnings on Friday. JPM, WFC and WBS all release results Friday morning. Sentiment toward the banks has turned very negative since the “no taper” surprise, and recent reports of depressed trading volumes and revenues have added to concerns. So, it’ll be very interesting to see if the reality of the results matches the low expectations.
Second, while economic data will be sparse, there are a number of Fed speakers this week (two on Tuesday and twoon Thursday), in addition to the FOMC minutes being released on Wednesday. In addition to the Fed speakers, we will also hear from ECB head Mario Draghi, who makes comments in Massachusetts on Wednesday, and BOJ head Haruhiko Kuroda speaks Thursday in New York.
The economic data last week implied the U.S. and global recoveries are still ongoing, but they’ve lost a little momentum from August. The most-watched numbers last week were the U.S. and international manufacturing and service sector PMIs. And across the board, they reflected continued expansion but a slight loss of momentum.
Chinese and European manufacturing PMIs remained above the 50 level (both at 51.1) but declined marginally from August readings, while service sector PMIs both beat expectations. It was the exact opposite in the U.S., as September manufacturing PMI hit another multi-month high at 56.2 vs. 55.0 (E), while non-manufacturing PMI declined to 54.4 from a high August reading (57.0).
The takeaway from the global PMIs is that, while they lost some momentum, they still imply the global economy is recovering. As such, the numbers don’t give any reason to think the “global economic recovery” thesis, that has in part led to international outperformance over the past several months, is ending.
Looking domestically, last week was “jobs week.” But because of the government shutdown we didn’t get the monthly Employment Situation report, making the week somewhat anti-climactic. Given that, the ADP report took on a bit more significance. So, the fact that it missed estimates and saw a decent downward revision to the August data weighed on markets and continues to imply we’re not seeing the incremental improvement in the national jobs market that we would like. And, the drop in jobless claims, which remained just above 300K last week, isn’t yet resulting in a pickup in hiring.
Even before the government shutdown, this week was going to be quiet from an economic standpoint. But because of the shutdown, the most-anticipated number of the week (retail sales on Friday) has been postponed. The Produce Price Index (PPI) and wholesale trade are also being delayed.
Turning to what will be released this week, the most-anticipated will be the Fed minutes on Wednesday. We have had an endless parade of Fed speakers since the surprise “No Taper” in September, and basically we’ve had two conflicting messages from them. Some Fed governors, such as Dudley and Williams, have been pretty dovish—implying the economy isn’t strong enough for the Fed to taper. Conversely, some Fed governors such as Bullard have repeatedly said not tapering QE in September was a “close call.” Given all the Fed confusion, the minutes will be poured over for clues as to just how close the Fed was and is to tapering. Going into the minutes this week, the overwhelming expectation is for tapering of QE at the December meeting at the earliest, and many are now expecting the first taper to occur in early ’14.
Other than the minutes, data is very light, assuming the shutdown stays in effect. The three releases this week are consumer credit (Monday), jobless claims (Thursday) and University of Michigan Consumer Confidence survey.
Bottom line on data this week is nothing released is going to materially change the current expectation that both the global and U.S. economies are recovering at a slow pace. And, really, markets will be gaming on any potential negative effects of a protracted U.S. government shutdown and debt-ceiling crisis more than they will be trading off any data released this week.