Becalmed Markets Conceal Rising Anxiety

The US dollar is narrowly mixed against major and emerging market currencies.  Comments by House Speaker Boehner that he will form a majority bloc to avoid a default by the Federal government is being understood two ways.  

On one hand, some take from that a protracted closure that last to October 17, when the debt ceiling is thought to be reached, or possible a few days later when the Treasury projects it will exhaust its cash.  On the other hand, some see in the comments a willingness to do the right thing.  

The latest accounts suggest a growing number, now around 20 House Republicans that would approve a continuing resolution bill that does not include the de-funding of the Affordable Care Act.   The failure of the dollar to continue to sell-off may be partly a reflection of the desire by short-term participants not to be caught too short the greenback in case some agreement is struck, or movement in that direction, is seen over the weekend. 

Over the years,  the basket of goods one gets for being a citizen in nearly all high income countries, has included health care.  The plans vary from country-to-country, with different roles for the state.  Even though between Medicare, Medicaid and the Veterans Administration, the US government manages the health care for around half of Americans, the Affordable Care Act follows the Heritage Foundation (conservative think tank) paper that called for a completely private sector (no public sector option) program.  Many international observers do not understand the virulent attack on the Affordable Care Act, which was approved by both houses of Congress and passed the muster of the US Supreme Court.   

There seems to at least a partial overlap between those that are opposed to the Affordable Care Act and those that want to see the Federal Reserve reduce exit from its long-term asset purchase program (QE3+).  Ironically, the longer the government is closed, the greater the economic dislocations and the less likely the Federal Reserve will taper.  

On balance, looking across various asset classes, we would conclude that the level of anxiety has risen, but investors are still largely anticipating a benign outcome.  The VIX increase to three month highs reflects that anxiety.  The biggest impact in the US debt market may be the four week T-bill yield.  It finished last week just below 3 bp (annualized) and rose to nearly 15 bp yesterday before pulling back, and is now near 12 bp.  However, the  3-month bill yield is yields a little than 3 bp after finishing last week at less than 1 bp. The 10-year Treasury yield is virtually unchanged on the week.    The 5-year credit default finished last week near 31 bp and is now quoted near 38 bp, which is the highest since April.  These are not thought to be very active and in the past, an increase is seen by some large funds as an opportunity to raise some cash by selling them. 

The strongest performer against the US dollar today is the Australian dollar, gaining about 0.5%  It is also the strongest currency over the past five sessions, up about 1.4%.  .  It has been buoyed again by ideas that the central bank's easing cycle is over and  new forecasts of higher iron ore prices.   There are still some observers who expect another cut from the RBA, but have pushed it into next year.  Several local banks have also raised there forecasts for the Australian dollar.  It appears poised to retest last month's high near $0.9530. 

The yen is the second strongest currency on the day and week, gaining 0.1% and about 1.1% respectively.. The Nikkei,though lost nearly 1% today, bringing this week's decline to 5%, the largest decline in two months and among the poorest weekly performances of the year.    The BOJ concluded its two-day meeting and left its economic assessment and stance unchanged.    

Sterling is the weakest performer of the major currencies, losing about 0.5% on the day, yielding the gains scored earlier in the week.  Profit-taking and cross-related activity appears to be the main culprit both yesterday and today.  Support is seen near $1.60.  The news stream has been light, but of note UK auto sales continue to be impressive.  Auto sales rose a little more than 12% in September, the 19th consecutive monthly gain and at the highest level in five and a half years.  The rise is concentrated in the retail as fleet and business sales appear largely flat.  About 1 in 7 cars sold in the UK are made there.  

We note that Italian assets are continuing to outperform in the aftermath of the Letta government surviving the vote of confidence earlier this week.  The tension is not completely over.  The Senate panel is set to vote on enforcing Berlusconi's ban on public office today.  In addition, Berlusconi, who ended up supporting the government in the confidence vote is trying to avoid a fissure in the party.  

The senior member of the group of the center-right rebel faction (Formigoni, previously the Governor of Lombardy) has indicated that efforts to form a new party have been suspended.  The situation looks very fluid.  The sinking of a migrant boat off the coast of Sicily has also disrupted the political maneuvering.   Berlusconi's reaction to the Senate panel will be scrutinized for clues. 

The US government shutdown means that the jobs report will not be released today.  There are a number of Fed officials that speak today.  The regional presidents (Fisher, Lacker and Kocherlakota) are not voting members of the FOMC.   NY Fed President Dudley and Governor Stein do vote.  Dudley spoke earlier this week and it is clear that he wants to see the economy strengthen further before sanctioning tapering.  Stein previously had expressed concern about some distortions caused by QE, but concerns have likely eased.  He is slated to speak about tri-party repos.  

Separately, Canada reports the Sept IVEY purchasing managers index and the consensus calls for improved to 53.6 from 51.0.   In Asia and Europe, the US dollar has been confined to about a 15 tick range against the Canadian dollar.