SCOREBOARD: Debt limbo

Well the session started off well enough, with a risk bid applied across most markets as US jobless claims fell to 398,000 in the week to July 23 (a three month low), from 418,000. Pending home sales also bounced 2.4 per cent in June after an 8 per cent gain in May, adding to the momentum. At the high, the S&P was up 0.9 per cent, commodities had a modest bid and Treasury yields rose a touch. Without a deal on the debt ceiling though, such moves were unlikely to last – and they didn't. Effectively, we're in some kind of limbo, punters just biding time until a deal is reached.
 
At the moment, House Republicans believe they can pass a bill, with a vote due this evening US time, I believe. Yet Senate Democrats have said that any bill would be quickly rejected. The sticking point apparently is that the GOP wants a temporary increase in the debt ceiling followed by another vote during the 2012 presidential election campaign. Democrats obviously don't want this and want an extension that will carry them through the election. So in the end, Wall Street finished 0.3 per cent lower on the S&P (1300), with telecommunications, industrials and energy stocks taking the brunt of the selling. Tech, financials, and consumer good stocks were flat to modestly positive. The Dow was then off 62 points (12240), the Nasdaq rose 0.1 per cent (2766) and the SPI was 0.2 per cent lower (4422).
 
The US dollar then recovered a bit in trading overnight, with the dollar index up smalls. The Australian dollar was down 55 pips, however, to 1.0944, while the euro lost 43 pips to 1.4320 and the yen was little changed at 77.75. The British pound strengthened against the US dollar though, up 30 pips to 1.6357. As for commodities, moves were fairly lacklustre. Gold was up smalls ($1616) and copper was up 0.5 per cent, but crude was off about 0.2 per cent on both Brent and WTI, at $117.2 and $97.2 respectively. 
 
While stocks, commodities and forex may be feeling the impact of the debt debate, there are few signs of stress in the debt markets. US treasury yields remain very low and indeed fell further last night (although moves were small). At the close the 2-year yields 0.42 per cent, the 5-year is at 1.53 per cent and the 10-year is at 2.96 per cent – all down only modestly from 1630. Much is being made of a 'spike' in bill yields, especially August t-bills, due to default fears. The reality is that t-bill yields all the way to the 1-year offer a return indistinguishable from 0. So while they are up slightly, the moves are meaningless. Similarly, libor rates haven't budged. Overall the feeling is that a compromise will be reached.
 
There wasn't much else going on otherwise and it was a pretty boring session all up. The global dataflow was OK. So in Germany, the number of unemployed fell 11,000 while the unemployment rate was steady at 7 per cent. Then the European business climate indicator fell to 0.45 in July from 0.92 the month prior. The indicator is still at a high level though (the average is 0.1) and continues to point to robust growth.
 
Looking at the day ahead, we get New Zealand building permits at 0845 AEST and then for Australia there's RP data-Rismark's house price series followed by the RBA's credit numbers. Tonight the key focus will be on US GDP. The market looks for a 1.7 per cent gain after a 1.9 per cent gain in the first quarter.

Adam Carr is senior economist at ICAP Australia. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles. 

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