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World Week Ahead: Dancing on US debt ceiling

Monday 4th September 2017

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Investors will eye the return of Congress on Tuesday and its ability to stave off a US default by raising the country’s federal debt ceiling, while they will also watch a European Central Bank policy meeting for a potential decision to start tapering its asset purchases. 

“A delayed debt ceiling hike is still clearly possible,” Goldman Sachs strategists wrote in a Tuesday note, according to Reuters.“The president continues to raise the possibility of a shutdown if the border wall is not funded, and the upcoming extension of spending authority is likely to be temporary, potentially pushing the risk of a shutdown later into the year.”

The latest US jobs data underpinned bets that the Federal Reserve will announce a decision to start unwinding its US$4.5 trillion balance sheet at the end of its next two-day meeting on September 20.

US nonfarm payrolls rose by a lower-than-expected 156,000 in August, while average hourly earnings gained a less-than-expected 0.1 percent, according to a Labour Department report released last Friday.

“We see nothing here that prevents the Fed from initiating its balance-sheet reduction plan at the September meeting,” John Ryding, chief economist at RDQ Economics in New York, told Reuters. 

Fed officials may offer fresh clues, including on plans for a third interest rate hike this year, when they speak in the coming days. Lael Brainard, Neel Kashkari and Robert Kaplan speak on Tuesday, Loretta Mester, William Dudley and Raphael Bostic on Thursday, with Patrick Harker on Friday. 

“Fed funds futures currently point to less than a 30-percent chance of a policy rate increase by the end of 2017,” Capital Economics economist Oliver Jones said in a note. "But we still expect the Fed to hike again in December."

Today US financial markets are closed for the Labour Day holiday. 

Last week, the Dow Jones Industrial Average rose 0.8 percent, while the Standard & Poor’s 500 Index rallied 1.4 percent, and the Nasdaq Composite Index jumped 2.7 percent to close at a record high on Friday.

“There is nothing new that drives the market upwards, but also no vivid reason to sell, so people are looking for a catalyst,” Katrina Lamb, head of investment strategy and research at Bethesda, Maryland-based MV Capital Management, told Bloomberg.

Wall Street’s fear gauge—the CBOE Volatility Index or the VIX—fell 4.3 percent to 10.13 on Friday. 

“I see a healthy dose of pessimism out there, but it seems like stocks will go higher before they go lower,” Advisors Asset Management’s chief executive officer Scott Colyer told Bloomberg. “There will be more tension as everyone will be trying to figure out when is the right time to sell.”

The latest US economic data scheduled for release this week include factory orders, due Tuesday; international trade as well as the PMI services and ISM non-manufacturing indices, and the Fed's Beige Book, due Wednesday; weekly jobless claims, and productivity and costs, due Thursday; and wholesale trade and consumer credit, due Friday.

ECB policy makers gather on Thursday. They will discuss the pace of the central bank’s asset purchases after December when the current program is scheduled to expire. Yet it’s conceivable that the decision won’t be finalised until the December 14 meeting, Bloomberg reported, citing euro-area officials familiar with the matter. 



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