With The US Debt X-Date Just One Week Away, At Least Continuity At The Fed Is Preserved

For all expectations of a big jump in US futures overnight on the largely priced in Janet Yellen nomination announcement which is due at 3 pm today, the move so far has been very much contained, as expected, with a modest 90 minute halflife, as the markets' prevailing concern continues to be whether the debt ceiling negotiation will be concluded by the October 17 deadline or if it would stretch further forcing the government to prioritize payments. There is however some hope with Bloomberg reporting that some possible paths out of the debt impasse are starting to emerge with less than a week before U.S. borrowing authority lapses after Obama said he could accept a short-term debt-limit increase without policy conditions that set the terms for future talks. Whether this materializes or just leads to more empty posturing and televized press conferences is unclear, although as Politico reports, the stakes for republicans are getting increasingly nebulous with some saying they are "losing" the fight, while the core GDP constituency is actually liking the government shutdown.

Looking at global markets, as RanSquawk reports, in Early European trade stocks were seen in minor positive territory across the board amid Italian and Spanish bond syndications which is expected to draw in a respectable level of demand, with FTSE MIB and IBEX 35 leading the way for European equities. In addition there is more of a risk on sentiment as equities begin to pare back some of yesterday's lows. However, they still remain short of the highs reached on Monday.

In terms of overnight news, one of the most crucial developments has been the news that the White House have said that President Obama is set to announce Janet Yellen as the next Fed chair later today. T-notes initially saw upside following this news, however, this move was later pared. Fixed income markets have been seen higher across the board as UK Gilts provide direction for the market following a weaker than expected release for production figures and a larger than expected UK trade deficit. The news resulted in 6-week lows in UK 10yr yields with bund futures rising in sympathy.

Courtesy of the government shutdown, today the only events on the docket are the MBA mortgage apps at 7 am, and the FOMC Minutes release for the "no Taper" decision meeting at 2 pm Eastern.

Overnight news bulletin from Bloomberg and Ran

  • The White House said US President Obama is to announce the nomination of Janet Yellen as next Fed Chair on Wednesday and that Obama is to hold an event at the White House at 1400CDT/2000BST to announce the Fed nomination.

  • Alcoa kicked off the latest earnings season after the closing bell on Wall Street yesterday and reported Q3 Adj. EPS USD 0.11 vs. Exp. USD 0.05 (of which $0.09 was due to restructuring addbacks), while also reaffirming forecast for 2013 global aluminium demand.

  • ECB's Asmussen says the ECB still has room to move on interest rates, the ECB has a whole array of nonstandard measures available.

  • Treasury yields from 5Y to 10Y fall by 1bps-2bps as Obama opened the door to talks with Republicans on topics ranging from health care to entitlement programs if they end the impasse over the U.S. debt ceiling.

  • Maturing Coupon Issues, Key Dates After Oct. 17

  • Obama will nominate Janet Yellen as chairman of the Federal Reserve, which would put the world’s most powerful central bank in the hands of a key architect of its unprecedented stimulus program

  • Yellen’s nomination raises the odds of prolonged U.S. stimulus that could strengthen the yen and damage the Japanese economy, said Koichi Hamada, an adviser to Prime Minister Shinzo Abe

  • Obama poured cold water on calls for him to invoke the Constitution’s 14th Amendment to skirt Congressional approval for issuing new debt, as both political scholars and legal experts said such a crisis-aversion plan would be risky and potentially illegal

  • Week’s auctions continue with $21b 10Y notes; yield 2.63% in WI trading, drew 2.946% in September

  • Steven Cohen’s SAC Capital Advisors LP was told $1.8b and an admission of wrongdoing by the hedge fund firm would be the price tag for resolving securities-fraud charges, people familiar with the matter said

  • Sovereign yields mostly lower, peripheral spreads widen. Nikkei rises 1.03%, leading most Asian markets higher; European stocks mostly lower, S&P 500 futures gain. WTI crude, copper, gold rise

Asian Headlines

BoJ Minutes from the September 4th-5th meeting said Japan is expected to continue moderate recovery and that members agreed that Japan's virtuous cycle of production, income and spending is working steadily.

BoJ deputy governor Nakaso sees no immediate need to ease policy, commenting that the BoJ has so far successfully curbed the yield rise and lifted inflation expectations.

EU & UK Headlines

UK Manufacturing Production (Aug) M/M -1.2% vs. Exp. 0.4% (Prev. 0.2%)
UK Industrial Production (Aug) M/M -1.1% vs. Exp. 0.4% (Prev. 0.0%, Rev. to 0.1%)
UK Visible Trade Balance GBP/mln (Aug) M/M -9625 vs. Exp. -8850 (Prev. -9853, Rev. -9941)

German Industrial Production SA (Aug) M/M 1.4% vs. Exp. 1.0% (Prev. -1.7%, Rev. to -1.1%)

ECB's Asmussen says the ECB still has room to move on interest rates, the ECB has a whole array of nonstandard measures available. He also said that the central bank is looking at money market rates closely, adding that it can do a number of things if necessary.

Germany sells EUR 3.347bln in 1.0% 2018, 2.0 b/c (Prev. 1.5) and avg. yield of 0.81% (Prev. 1.0%), Retention 16.3% (Prev. 19.22%)

US Headlines

The White House said US President Obama is to announce the nomination of Janet Yellen as next Fed Chair on Wednesday and that Obama is to hold an event at the White House at 1400CDT/2000BST to announce the Fed nomination.


Stocks recovered from a lower open to trade broadly higher, with financials and utilities benefiting the most from the modest credit spread tightening following somewhat dovish comments from ECB's Asmussen, as well as the fact that Janet Yellen was confirmed as a replacement for Bernanke to lead to Fed.

As a reminder, Alcoa kicked off the latest earnings season after the closing bell on Wall Street yesterday and reported Q3 Adj. EPS USD 0.11 vs. Exp. USD 0.05, while also reaffirming forecast for 2013 global aluminium demand.


The release of weaker than expected macroeconomic data from the UK resulted in broad based GBP weakness, which in turn saw GBP/USD move back below the 21DMA. However even though this managed to support EUR/GBP, EUR/USD also traded lower, as yields on US T-Bills continued to rise given the lack of progress made on resolving the deadlock in Washington.


Despite firmer USD, both WTI and Brent crude futures are seen little changed, as market participants look for further clarity on budget/debt ceiling talks in Washington and also await the release of the latest DOE data at 1530BST.

US API US Crude Oil Inventories (Oct 4) W/W 2760K vs. Prev. 4500K.
- Cushing Crude Inventory (Oct 4) W/W -156K vs. Prev. -83K
- Gasoline Inventories (Oct 4) W/W -2800K vs. Prev. 326K
- Distillate Inventory (Oct 4) W/W -1070K vs. Prev. -157K

The White House has said the US is halting all military assistance to Egypt and that they will announce future of Egypt assistance in the coming days.

Iran is preparing to offer to halt near weapons grade enrichment in order to seek sanctions relief, according to an official.

Chinese net gold imports from Hong Kong in August were 110.2 tons vs. 113.2 tons in the previous month.

According to reports, shipments to China fell from Hong Kong in August after some Chinese banks used up their import quotas.

UBS said iron ore may fall to short-term low of USD 70 on seasonal steel output cut and that iron ore risks correction as Australia output gains. UBS also forecasts iron ore averaging at USD 120 in 2013 and USD 110 next year.

* * *

We conclude, as usual, with Jim Reid's take on the recent set of events

Up until yesterday, this shutdown/debt ceiling debate was becoming the most dull and boring potential major financial catastrophe in history. However over the last 12-24 hours the small cracks that have appeared in financial markets over the last week have started to edge open a little bit wider. On the plus side this may start to help concentrate the minds of the politicians a bit more after another day of stalemate and lack of urgency. Our thoughts are that this will get resolved when either the market forces the issue with a big sell-off or when we get closer to an as yet unspecified hard-date as to when the US runs out of money. On the latter, one concrete thing we did learn yesterday is that Treasury Secretary Jack Lew will testify to the Senate Finance Committee tomorrow at 8:30am (ET) to discuss the debt ceiling including issues of how hard the 17th of October date is. This meeting may give us some improved clarity as to when 1 minute to midnight is going to be in this crisis. The perception is that it’s actually nearer the end of the month.

On market pressure, of particular interest yesterday was the sharp rise in T-Bill yields with 1-month climbing 17bps to 0.337% and similar maturity auction clearing at 0.35% - both at the highest levels since October 2008. Indeed, one month T-Bill yields rose above 1-month USD LIBOR for the first since at least 2001. Back in October 2008, 1-month T-Bill yields rose by 39bp to 45bp when the Fed agreed to provide up to $540 billion in loans to money market funds following redemption calls. The T-Bill weakness encouraged the shorter-end of the treasury curve to underperform, including the 2yr which increased 4bp in yield to 0.38%, on a day when the 10yr yield was basically unchanged at 2.63%. While the debt ceiling stalemate has placed plenty of focus on shortterm US rates and the price of US government credit default swap protection, the 10yr yield remains firmly within the 2.60% to 2.65% range that has held over the last two and half weeks even as debt ceiling concerns have escalated. Whether we ultimately see a flight to, or a flight away, from treasuries as the debt ceiling deadline nears is still clearly up for debate.

Partly offsetting some of the market pressure, the Wall Street Journal has broken the news that President Obama is ready to formally nominate Janet Yellen as the next Fed Chair. The President will hold an event at the White House at 3pm USET today to formally announce the Fed Chair nomination, according to a White House statement. The Yellen nomination news has erased some of the market bearishness from yesterday which saw the S&P 500 drop almost 21 points (-1.23%), bringing the index virtually back to May 22nd Bernanke-JEC levels. Though the VIX index rose to a near four month high of 20.25pts, the other “fear-barometer”, gold, fell 0.3%.

Looking at markets this morning, S&P futures are up 0.3%, helped by the Yellen headlines and also by the aftermarket earnings beat from Alcoa  (more below). Japan’s TOPIX (+1.0%) is leading the region's equity markets helped by exporters after a 0.5% jump in USDJPY. The BoJ’s September minutes didn’t provide any major surprises. Elsewhere in the region, the Hang Seng (-0.6%) and ASX200 (+0.1%) are off this morning’s opening lows.

Recapping Tuesday's DC dramas, it was generally a day of lots of action but few results. At the leadership level, House Speaker Boehner kicked off the days events with a statement that he, "isn't drawing lines in the sand" and was open to discussions with the President to reopen the government and raise the debt ceiling. Soon after this he had a call with the President, in which the President reiterated his refusal to negotiate on bills to reopen the government or raise the debt ceiling. Obama held an afternoon press conference in which he reiterated those same points, but some highlighted that there was a hint of compromise when the President said may be willing to negotiate with Republicans if Congress supported a short-term debt limit increase and continuing resolution. Over in the House, yesterday saw Republicans float the idea of forming a super committee with Democrats to resolve differences and get the government reopened, however the Democrats swiftly rejected this idea, citing the failure of the 2011 super committee to achieve any meaningful results. In the Senate, Democrats pushed a plan to raise the debt ceiling without policy restrictions with Democrat Majority Leader Harry Reid saying he believed he had the 60 votes necessary to overcome procedural hurdles later in the  week, which included 6 Republicans. The Republicans dispute this. Reid is looking for a $1trillion debt ceiling increase that is expected to be sufficient to fund treasury until the end of 2014.

Having said all that, there were a few bright spots across the globe away from the wall of worry in DC. European fixed income had one of its busiest primary issuance days in weeks with new deals pricing across the SSA, financials and corporate sectors. In US primary markets, T-Mobile is set to price the secondlargest high yield deal of the year, raising around $5.6bn (Bloomberg). On a related note, Reuters reported that the recent success of the Verizon recordbreaking bond deal has given US telco AT&T sufficient confidence in bidding for assets, for example Vodafone, and being able to raise the required financing in bond markets (Reuters). So while markets worry about events in Washington, it seems funding markets remain very much open to issuers.

Other positive snippets included Alcoa, who kicked off the US Q3 reporting season overnight with a strong beat on the adjusted EPS (11c vs 5.4c expected) while also managing to top consensus revenue estimates ($5.76bn vs $5.63 expected). The announcement came after the closing bell, but the stock was up 1-3% in aftermarket trading. We also saw a solid EM performance yesterday in the face of the DM sell-off with the MSCI EM equity index closing 0.4% higher. The recent slide in the USD, and expectations that Fed tapering has been delayed at least for a few months, have helped sentiment there.

Turning to the day ahead, apart from the news flow in DC, the FOMC minutes from the September meeting will be the main focus today. The Fedspeak over the last couple of weeks has suggested that it was a close call between tapering or not at the September meeting. MBA mortgage applications will be released today, but it is unlikely that we will get US wholesale inventories data. In Europe, industrial production numbers for the UK and Germany are scheduled today. It’s also worth watching today’s 10yr UST auction.

Sign Up

Get the InvestingChannel
Free e-Letter Today

Learn More

Independent market opinion, analysis and ideas - delivered every business day

Premium market opinions, analysis, and ideas - delivered every business day

Editor's Picks