If the Washington deal in the US Senate to end the budget and debt ceiling impasse is passed by the Republican-dominated House of Representatives in the next 24 hours, then the crisis will be over until early 2014.
The deal needs 217 votes in the House of Representatives to pass – there are 200 Democrats, so 17 or more Republicans will have to break ranks to approve it. If that doesn’t happen, the deadline crisis will be upon us around 3 pm Friday, Sydney time,
News of the deal sent markets higher in a big relief rally. The Dow, S&P 500 and the NASDAQ were all up by more than 1.2%. Just how long this rebound can continue will be seen when trading resumes in the US tonight.
Gold and oil edged higher. The US dollar and the Aussie dollar firmed. The AUD is now trading around new four month highs at just under 95.50 US cents.
Our market should start higher by around 20 points, according to the share price futures contract. Markets elsewhere in Asia will also be higher as the relief rally continues.
But overshadowed by the impasse was the so-called Beige Book from the US Federal Reserve, which was released overnight and contained anecdotal reports of a slowing in activity in some parts of the US.
The Beige Book is a summation of reports from all 12 of the Fed’s districts across the US and was prepared up to October 7 ahead of the next meeting of the Open Markets Committee at the end of this month.
The contents of this report, along with the continuing budget and debt negotiations and another deadline in a few months time, will be enough to end any talk of the Fed cutting its $85 billion a month in stimulatory spending until well into 2014.
That reading, as much as the ending (for the moment) of the debt and budget crisis, was behind the rise in markets, especially Wall Street.
And with the next choke point in the budget deal reported to be early 2014, the Fed won’t be ending its support for the economy until it is sure everything is settled.
That means no decision on so-called tapering the $US85 billion in spending until perhaps the second quarter of next year.
The Beige Book said that about a third of the country was experiencing slower growth in September and early October while there was only scattered reports of any impact of the government shutdown.
The report said the Richmond district, which includes Washington, reported concern about the closing of tourist attractions in the nation’s capital. Many other districts reported rising unease about the shutdown and the debt-ceiling debate.
Four of the Fed’s 12 banking districts: Philadelphia, Richmond, Chicago and Kansas City, reported that growth had slowed. The other eight districts were little changed. Overall, the survey reported the same “modest to moderate” growth that has been in place for most of the year.
Consumer spending grew modestly, fueled once again by rising car sales. Retailers remained optimistic about the upcoming holiday season.Construction and residential real estate activity improved, although a number reported concerns in the industry over rising mortgage rates.
The Boston district saw the debt ceiling as a particular problem. “Firms doing business with the government have been affected by the sequester,” the Beige Book said. “Other firms are also concerned about potential effects of the government shutdown on consumer demand or broader economic effects of hitting the debt ceiling.”
By comparison, nonresidential construction expanded at a slower rate. Factory activity continued to expand modestly, with three banking districts reporting faster activity and three others seeing weaker conditions. Employment growth was modest and price pressures remained limited. Demand for consumer loans softened.
Overall, the impression left by the Beige Book is an economy not growing strongly enough to convince the Fed to start trimming its spending. If anything the real impact on activity from the past fortnight or so won’t be seen until the next beige Book in late November.
The compromise re-opens the government until January 15, raises the debt ceiling until February 7, and requires negotiations to reduce the budget deficit to be completed by December 13.
News reports said US Government agencies could also get more flexibility to arrange their budgets to comply with long term cuts in spending introduced in the last big budget agreement in 2011 (The so-called Sequestration cuts).
The Senate deal has dropped almost all the initial Republican demands that triggered the crisis, to change aspects of “Obamacare”. Whether that survives the lower house vote will be of interest.
