A vote today, but the key is in Senate

The House of Speakers is likely to hold a vote on a modified version of Boehner’s plan today (he had to beef it up after the CBO said the savings were likely to be lower than estimated by Boehner). Even though the House is under control of Boehner’s party the win is not guaranteed since some Republicans are against the plan and some still undecided. Nevertheless the odds for a win are quite high – Boehner may lose 23 votes from his camp and still get the plan approved. Still that will be just a baby step.

Senate will be the crucial phase. If some Democrats choose to back Boehner and the plan will be accepted Obama will most likely sign it. That’s a big “if” though. Even though there is already a substantial overlap between proposals (Democrats no longer insist on tax hikes and both sides see a similar scale of cuts in discretionary spending) Democratic leaders would have a hard time communicating to their people that the limit story would be bound to return in the heart of the presidential campaign and that will be in the plan to be voted today in Congress.

Markets remain extremely nervous which was apparent yesterday on Wall Street and is more than evident on pairs like USDJPY, USDCHF and EURCHF. The last one is just testing the local lows from two weeks ago (1,1488) – no too far from historical lows from the previous week (1,14) – and all this with solutions for PIIGS already in place. There is no doubt that the dollar (and euro to some extent as well) would recover strongly vs CHF and JPY should a reasonable compromise be achieved. 

Beige Book confirms a slowdown

While macroeconomic releases are somewhat overshadowed by the ceiling talk, the picture they are revealing isn’t encouraging either. Yesterday we saw June’s orders sliding by as much as 2,1% m/m and the Beige Book confirmed a slowdown in the US economy. While the Book saw some revival in non-auto consumer spending it also noticed soft labor market and stagnant residential market.

As we stated above, a reasonable compromise in Congress may spark some relief rally. Nevertheless when the dust sets investors will need to catch up to the weaker economic outlook and that will weigh on stocks and commodities.

Technically, S&P500 is close to negate a bullish 5-wave structure. That would happen if the price slides below 1290 pts. Instead of the wave-3 we would have a consolidation at best but frankly that would suit fundamental picture much better.

Event to watch – vote in Congress, US claims, Japanese package

If Boehner is unable to push his proposal through the House of Speakers nothing else is going to count. On the macroeconomic front, investors may pay some attention to the weekly claims in US (8.30 ET, 14.30 CET, consensus 413k). Japanese data most likely will not impact markets significantly but it is still worth to see if the output (expected 4,6% m/m) and the PMI (50,7 pts. last month) confirm a revival there. DuPont, ExxonMobil and Motorola are among companies to release quarterly reports today.      

Przemysław Kwiecień PhD, Chief Economist

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