(MONDAY 1ST AUGUST- 07.40 - JAMES GERRISH)....It seems US politicians are close to agreement on the US debt situation that would raise the $14.3 trillion debt ceiling (by about $2.8 trillion), cut spending by about $1 trillion, and call on Congress to shave another $1.8 trillion from long-term debt by year's end, or face reductions across all areas of the government.
They're still nutting out the details relating to trigger events for the reductions however Senate Majority Leader Harry Reid has just released a statement saying he has signed off on the debt-ceiling pending caucus approval. We've also got Obama scheduled to speak at 11am our time which will offer some more insight. It finally feels like progress is being made ahead of tomorrow's deadline. This should be a significant positive for MKTs this morning - US FUTURES are rallying +139pts in the DOW since the news broke.
On Fridays session the DOW JONES lost ground again with the index off -96pts while the S&P 500 fell -0.66%. Locally, the ASX 200 fell -39pts on Friday breaking through the critical support area of 4450. This is certainly a negative from a technical standpoint however I want to avoid being too hung up on specific levels given the catalyst for the recent weakness (which can be solved pretty quickly). On the week, the S&P 500 lost -4%, the All Ords were down -3.7%, Gold was up +1.5% (to a record high) as was the Aussie (+1.5%).
Locally, SPI FUTURES were matching down -3pts this morning.
The main concern I had from the States on Friday was the anemic GDP print for the June QTR - up just +1.3% (annualized) + there was a downward revision of the March figures from +1.9% to +0.4% caused by a lower than previously thought inventory levels. So with debt ceiling issues, European contagion fears and now the US economy spluttering when it should be accelerating and the picture for a Monday morning doesn't look great.
The main issue in the States is consumption (consumer spending +0.1%) and this is a product of low consumer confidence which is a global problem at the moment given the large Macro headwinds we've been talking about over the last few months. When confidence is high in the US people tend to buy cars which hasn't been happening (auto sales -23%). Some of which can be put down to supply chain disruptions from the Japanese earthquake but we can't keep using that as an excuse for ever.
So, US GDP printing +1.3% when most have been expecting around +3.5% at this stage of a recovery, most likely suggests that this recovery will be longer and slower than we've previously seen. That's not necessarily a negative for MKTs with super lose monetary policy and a low USD helping to support corporates. Given all the headwinds at the moment, the US share market actually seems to have held up OK.... which shows the value of being able to de-value ones own currency..!
INTEREST RATES
There has been a lot written over the weekend about raising rates in Australia when the RBA meet tomorrow. 10 days ago the concensus was for rates to be kept on hold and we even had Westpac calling for a cut. Last weeks read on inflation was a bit of a curve ball printing at +0.9% v expectations for +0.7%. But there seemed to be very little in the way of inflationary pressures outside of food and energy so from that perspective, the board could well look through that number.
Couple this with the Aussie dollar which smashed through $1.10 last week, obvious global uncertainties, weak domestic housing figures and you can construct a case for the RBA to remain on hold for while yet.
We now see the investment community divided about a +0.25% rate increase tomorrow. I don't think we'll get one but given the RBA's core mandate on inflation and employment, its a always a possibility.
