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Good commentary from Goldman on the debt ceiling “agreement” and what happens presuming that it passes.The bottom line: The market’s main concern re: the debt ceiling not passing was always the sharp hit to growth from a shutdown of government spending, and now that that’s over, growth is still the #1 concern.
The start of this week will be dominated once again by the US debt ceiling agreement. The President announced last night that a deal had been reached in principle by the leaders of both Chambers. As a result, US futures have traded higher overnight, while the USD has rallied against the CHF and JPY, but weakened notably against the rest of Asia. But the critical question remains whether the votes will be there once all sides consider the proposal. So there could easily be more volatility to come.
What is striking, as we discuss below, is that the market has traded the lack of agreement on the debt ceiling so far less on the notion of debt sustainability or credit risk and more as a further risk to the US cyclical picture. The fact that yields have fallen sharply is the clearest indication. Having taken a more upbeat cyclical trading stance a few weeks ago, we were finally stopped out of a short 5-year UST recommendation on Friday after the close below 1.40%, having been stopped out of a long recommendation in our Wavefront Growth basket in US equities a couple of days before.
As for what’s next…
The fact that the dominant market action has been consistent with a sharp downgrade to US growth views also suggests that even if an agreement is reached, the focus will probably quickly shift back to the state of the US cycle. Beyond the debt ceiling jitters, last week also continued the run of mostly-soft US data, with the Chicago PMI, durable goods and GDP releases all below consensus. Only a drop in weekly jobless claims provided a glimmer of hope in the other direction. This means that it is still unclear how much of the recent price action reflects the fiscal policy risks per se and how much is simply a growing acknowledgment of the slowing in the US growth picture and risks going forward even if the debt ceiling is raised. If the first of these risks is removed, the second may come even more clearly into focus.
This means that the week’s macro news – today’s ISM, Global Leading Indicator and other global manufacturing and services PMIs through the week, tomorrow’s PCE numbers, Thursdays claims release and Friday’s payrolls – will all be important markers, particularly if a Congressional deal is reached. The market is likely to trade relief if a government shutdown is avoided. But for that relief to persist and extend, the economic news will need to look better than it has. Most importantly this week, confirmation of some improvement in our final GLI of some of the more hopeful signs in the Advanced release and a sustained downtrend in US jobless claims would be encouraging.