By Christian Hawkesby*
As largely expected, Republicans and Democrats have taken it down to the wire and come to a last minute deal to divert US default disaster.
With time exhausted before the 17 October deadline, the US Senate has passed a bill that drops almost all the Republican’s demands, including the controversial call to repeal Obamacare.
The Bill is expected to receive support in the House of Representatives.
The US debt limit will be raised and 400,000 federal workers will return to their jobs. However, the bill is a temporary measure. There are three new dates to put in the diary.
1. A bipartisan committee is scheduled to report back with a long-term solution to the US fiscal situation on 13 December.
2. In the meantime, the bill provides government funding through to 15 January.
3. And the federal borrowing limit has been extended until 7 February.
The market has reacted positively to the news of the deal, with the S&P 500 up over 1%, and now only around 0.5% from its September peak. Risk-sensitive currencies also rallied, with the NZD rising above 0.8400.
Looking forward, we are now entering a period where it may be harder than usual to gauge the performance of the US economy, with some economic statistics still unavailable, and others skewed by the temporary effects of federal workers leaving and returning to the workforce.
This will put a greater onus on other indicators of economic momentum. We have now entered the US earnings season, and some of the strength of US equities overnight was due to companies beating earnings expectations. Economic data in the China and Europe also looks robust. Europe in particular has experienced a notable turnaround, with most indicators moving from contraction in 2011 and 2012 into expansionary mode by mid 2013.
While today’s deal did not include a package of US fiscal restraint, it is clear that this is still on the agenda, with more time required for Democrats and Republicans to come to a workable agreement. With government spending constrained, this puts more onus on the US Federal Reserve to retain loose monetary policy until they have a higher degree of confidence that the US economic recovery is on a sustainable path.
That reduces the likelihood of the Fed tapering its QE program in 2014, which on the margin should help support both equity and bond markets.
------------------------------------------------------------
Christian Hawkesby is a director of Harbour Asset Management and head of their fixed interest division. You can contact him here »
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.