Dollar Little Changed; No Default Tomorrow even without Agreement

There is much about the US fiscal melodrama that is a farce. Unlike other debt crises, this one is totally self-inflicted. It is a crisis of choice, not necessity. The misconstructions have been repeated so many times that they have taken on a life of their own. October 17 most certainly does not represent the deadline on a US default. 

The US debt ceiling was hit several months ago and the Treasury Dept has been taking extraordinary measures since to avoid hitting the debt ceiling. It is these measures Treasury Secretary Lew indicated were going to be exhausted no later than Oct 17. That means that they may already be exhausted. The government then operates on a cash and income basis, ironically, like so many households.

There is a large bill payment, $120 bln, due tomorrow. The government has funds to cover this. It also needs to be recognized that the Treasury Department raised $13 bln in new cash in yesterday's bill auction. Essentially, this coupled with Lew's indication that the Treasury will have about $30 bln cash, gives the government around $40 bln. Moreover, the size of today's bill auction ($68 bln) suggest that there is slightly more room under the debt ceiling than many had estimated.

If there is a material deadline, it is a week from now, when $93 bln of bills are due (Oct 24). That said, we suspect the US will be able to roll over those bills when the time comes. We note that although participation in yesterday's bill auctions were less than the recent average, both the 3- and 6-month bills were oversubscribed more than three times. 

Fitch placed its US rating on negative credit watch, citing the failure to lift the debt ceiling.  Like nearly every one else, Fitch too expected the debt ceiling to be raised soon.  Fitch says its will resolved its negative watch by Q1 2014.   Moody's, which retains a AAA rating on the US, also said not only that it anticipates the debt ceiling to be raised, but also provocatively indicated that it expects that the US will pay interest and principal on its debt even if the ceiling is not raised.  

Sterling is among the strongest of the major currencies, rising to its best level since October 9.  It has been buoyed by the largest decline in the unemployment claimant count since mid-1997.  The 41.7k decline, coupled with the revision to the August series, puts the claimant count decline twice the 25k that the consensus expected.  The ILO measure of unemployment, that the BOE's forward guidance refers to remained at 7.7%.  

Yet the real disappointment with the report was the average week earnings (3-month year-over-year) slipped to 0.7% in August (an extra month lag) from a revised 1.2% in July.  The weak earnings growth and firm price pressures erodes the real purchasing power of British households and over time is likely to weigh on consumption and, through that,  weaken the economy. 

Sterling has risen to test its 20-day moving average (~$1.6060) and has broken the down trend that has been in place since the start of the month.  A move above $1.6080-90 would be the first compelling indication that the bearish head and shoulders top pattern that we identified is not valid. 

Meanwhile firm New Zealand inflation  underscores expectations for a RBNZ rate hike in early 2014.  New Zealand reported Q3 CPI rose 1.4% from a year ago compared with a 0.7% pace in Q2.  The market consensus was for an acceleration to 1.2%.   The New Zealand dollar has outperformed over the past week and is challenging the multi-month high set in on Sept 19 near $0.8435.  The high for the year was set in April near $0.8675 and that appears to be what many are looking at.   Yet part of the recent demand has been linked to foreign demand for the NZD2.5 bln 2030 bond recently issued. 

There are two developments in Europe to note today.  First, and the most predictable, is that talks between Germany's CDU and the Greens have broken down.  This enhances the SPD's negotiating position.  Merkel does not want to lead a minority government.  She has made this clear and it makes sense politically give the numerous contentious issues that have to be addressed.  The SPD has jettisoned references to a joint European bond, but is pushing its domestic agenda.  

As realpolitik would have it, even though the CDU/CSU needs only a few votes in parliament, the SPD are demanding she deals for them all.  That is that the SPD are demanding half the ministerial posts, including Finance, and is pushing for half of the cabinet to be women.  In this vein, we note the recent junior ministerial shake up in the UK resulted in the elevation of several women and that Yellen will likely become the first woman to head up a major central bank. 

Second, auto registrations (a proxy for sales) rose in Europe by about 5.5%, the largest increase in a couple of years.  Many talk about the rise in London house prices as a key economic driver in the UK's recovery, but this is not to do the auto sector justice.  Unlike most countries in Europe, UK auto sales have been robust.  They rose 12.1% in September and are up about 8% this year.   The real surprise was in Spain, where auto sales jumped over 28%, encouraged by new incentives.  French auto sales also edged up; by 3.4%.  Germany and Italy reported small declines.  There were extra sales days in September, so it may take another month's read to feel confident that a corner has been turned. 

Lastly, we note some corporate news.  A news report suggests that Apple has told assemblers of its low cost 5c iPhone that it is cutting its order by as much as 20% in Q4.  Most of the suppliers are in east Asia.  The MSCI Asia Pacific Index was flat earlier today.  The MSCI Emerging Markets equity index is snapping off nearly 2%.  

In Europe, where the Dow Jones Stoxx 600 is off by about 0.3% near midday in London, two stories caught our attention.  First, the CAC is leading the weakest in the euro area, off 0.75%, weighed down in part by disappointing Q3 sales and guidance by Danone.  The luxury good maker LMVH also reported disappointing revenue numbers and the shares were punished.   Second, Italy's bourse is outpeforming today, gaining about 0.5%, helped apparently by an investment banks favorable comments about Telecom Italia and evidence that the Letta government is strong enough to continue to push a modest reform agenda.