Recap 10-03-13: Path Dependence in the Political Process


I’ve noted previously that things need to get worse before they can get better. That thesis appears to be playing out. There is talk of a “Grand Bargain” right now, but with the Republican themselves split, this seems a bit far fetched, and even optimistically interpreted would suggest an extended shutdown. The vast majority of the Tea Party Republicans hail from extremely safe Republican districts, so changes in public sentiment does not appear to be a likely catalyst at this point.

It’s up to Boehner. Basically any spending bill that will attract any bi-partisan support will pass right now. More specifically, the only ones in the House willing to change their minds and getting concerned appear to be the moderate Republicans. It seems a revolt of sorts from that group will be necessary to force Boehner to make a move. As a result, something akin to a sharp risk off move in global markets appears to be a prerequisite for a deal.

The strong consensus is that there will be a deal, and there is no concern of a default. And we are still a very long 2 weeks away from 10/17. We are now just 3% off the (marginal) all time highs. Technically, the S&P has closed below the 1681 support/resistance level that has been in play for the past 3 months, as well as the 50 day moving average:

The positive inflows due to the end of month effect will be played out by the end of the week. Positive economic data surprises are already elevated and momentum has slowed:

In other words, expectations seem pretty bullish all around, and pretty vulnerable to disappointment from a variety of sources.


  • China Non-Mfg PMI rose to 55.4 vs 53.9 prev
  • UK Services PMI was stable at 60.5 vs 60.3 exp
  • US Jobless Claims was stable at 308k last week vs 325k exp and 307k prev
  • ISM Non-Mfg declined to 54.4 vs 57 exp and 58.6 prev
  • In what appears to have been a planned leak, NYT reports that Boehner indicated that he would be willing to violate the so-called Hastert rule if necessary to pass a debt limit increase.
  • Republicans think shutdown could last for another 1.5-2 weeks (at least until the 10/17 debt ceiling) – The Hill
  • Moody’s revised Brazil’s outlook to stable from positive. Key credit metrics are deteriorating, especially government debt-to-GDP and investment-to-GDP ratios. There is evidence the economy is going through an extended low-growth period. The deterioration in reporting quality of the government accounts as well as continued treasury borrowings to support increased lending by public banks.
  • CME raises S&P e-mini futures speculator margin by 8.6% to $4,180 from $3,850. It’s effective after the close.
  • JGB purchases from "mega banks" are driving Japanese borrowing costs lower. "We have been increasing our JGB holdings since hitting a bottom at the end of June," a senior official at one megabank says. Another executive notes that restored stability in the bond market is a big factor. "Banks are having a hard time securing sufficient lending margins, so they are once again investing in bonds as a source of income for the second half.” Nikkei

Upcoming Data:

  • Thu: China Markit Services PMI
  • Fri: BoJ, US Employment (unlikely though)
  • Mon: RICS House Price Balance, Australia NAB Business Confidence, China HSBC Service PMI
  • Tue: German Trade Balance, Canada Housing Starts,