Julex Market Weekly 10-07-2010 | The Government Shutdown Continues and Debt Ceiling is Approaching

Top Stories Last Week

• US Stocks Shrugged off Government Shutdown

The US stocks were largely unchanged though the Congress could not reach an agreement on the new fiscal year budget and federal government partially shut down. Most of the market participants believed the shutdown would be temporary. In the week, S&P index remained flat, and MSCI EAFE index dropped 0.6%. The MSCI Emerging Market Index rose 2.4%. Gold declined 1.9%, but the SPGC commodity index was unchanged. The bond markets were little changed. Barclays US Treasury index was flat, but US high yield bonds was up 0.4%.

• US Government Partially Shuts Down

The political impasse that closed the federal government spilled into its sixth day showing no signs of abating, and leaving about 800 thousands federal workers on furlough. Resolving the crisis remains a politically difficult task since both the House Republicans and the White House see broader strategic implications. The Republicans’ decision to attach the condition to defund or delay Obamacare was pushed by conservatives, who think that the spending bills can have greatest leverage with President Obama. On the other hand, the president and his Democratic allies in Congress would like to make funding bills and regular increases to the debt ceiling routine matters without bringing Washington to the brink of fiscal crisis each time.

• Chinese Manufacturing Growth Edged Up

China’s manufacturing growth edged up slightly in September, with small firms struggling in the face of overcapacity and weak demand. The official Purchasing Managers’ Index (PMI) was reported at 51.1 last month from August’s 51.0, below expectations. Chinese manufacturers have sent mixed signals on the extent of their latest rebound. A separate manufacturing PMI issued by HSBC showed manufacturing grew less than expected last month on soft domestic demand.

• US Manufacturing Showed Continued Strength

The Institute for Supply Management’s manufacture index rose to 56.2, the strongest since April 2011, from 55.7 a month earlier. The improvements ranged from appliance and furniture makers to metals and transportation industries as the rebounds in housing and autos spurred growth. To sustain economic growth, manufacturing must now overcome the budget crisis that has led to the government shutdown, putting about 800,000 federal employees in furlough.

• European Central Bank Kept Monetary Policy Unchanged
The ECB decided to leave the main refinancing rate unchanged at 0.5%, and said that low interests have been taking effects in the economic recovery and urged governments to carry out reforms and strengthened the deficit levels. The central bank noted that the inter-meeting data signaled improvement in the euro zone economy, but unemployment continued to be high. The downside risks remained. ECB president, Draghi, iterated that the central bank is “ready to use any instrument including another LTRO if needed” to deal with liquidity problem.

• Bank of Japan Kept Monetary Policy Intact

The Bank of Japan kept monetary policy intact and revised up its assessment on capital expenditure, encouraged by growing signs that the benefits of its stimulus policy are broadening. The BOJ voted unanimously to maintain its pledge of bond purchases, at an annual pace of 60 trillion ($617 billion) to 70 trillion yen.

Top Stories to Watch This Week

• US Government Shutdown Continues

The resolution of the government shutdown appeared headed for a showdown over the fast-approaching national debt limit that is expected to be reached Oct. 17. Both the stakes and the chances of finding a resolution have become higher, because the consequences of a default are far worse than a closed government.

• US Retail Sales

Retail sales are likely to rise by 0.2% in September, according to economists.

• BOE Policy Meeting

Bank of England is expected to keep interest rate at 0.5% and bond purchases at 375 billion pounds a year.

• US Employment Report

Delayed by the government shutdown, the Labor Department will report nonfarm payrolls and unemployment rate this Friday. US employers are likely to add 179K jobs in September and jobless rate will remain at 7.3%.