Threat of a historical debt default looms

NBK WEEKLY MONEY MARKETS REPORT

KUWAIT: Last week, the dollar movement was hampered by the threat of a historical debt default and the lack of clarity over when the Federal Reserve will scale back its 85 Billion quantitative easing programs. Investors are now focused on the Federal Reserve Bank meetings in October 29-30 and December 17-18. Although some suspect the Federal Reserve would not start its tapering process until early 2014 .Chicago Federal Reserve President Evans , said that the third quarter GDP data that is due to come out on Oct 30th would give more insight on the timing of the FED’s tapering .

The US House of Representatives refused to give in to President Barack Obama’s demand for straightforward bills to run the government beyond Oct 1 and avoid a debt default that could threaten a fragile economic recovery. The US debt is at a new record high of $16.7 trillion. Treasury Secretary Jacob Lew calculated that the United States would run out of money by October 17 and would have less than $30 billion cash in hand if Congress fails to pass its spending bill.

We had mixed economic indicators in the US, the consumer confidence index fell slightly. However, the manufacturing sector continued to perform strongly, and the Jobless Claims dropped to its lowest level since 2008, suggesting that US economic activity has been expanding at a moderate pace.

In Europe, the ECB president Mario Dragi told the European Parliament that he is ready to issue another Long Term Refinancing Operation if needed to maintain a low interest rates environment. In addition, Germany, Europe’s largest economy, had positive economic indicators especially in the business, manufacturing and consumer confidence sector.

More news that is positive came out of the Far East with the Chinese manufacturing index rising to a six-month high and Japanese exports rising 14.7 percent year on year. Also in Japan, August headline CPI came in stronger than expected, rising to 0.9 percent y/y from the 0.7 percent pace in July suggesting that the Bank of Japan easing program is helping Japan move out of the deflationary conditions.

The EUR/USD, traded in a tight range of 1.3460-1.3564 ahead of the ECB’s rate decision due next week, also the AUD/USD, followed suit trading in a tight range of 0.9295-0.9460 ahead of RBA’s rate decision early next week.

US Treasury yields neared the 2.6 percent mark as investors moved to a safe haven as both the debt ceiling and the Fed Reserves tapering plan encouraged buyers.

US consumer confidence

The US consumer conference Board, said its index of consumer attitudes fell to 79.7 from a revised 81.8 in August, slightly missing market expectation of 79.9.The drop in the confidence index was due to the resurfacing of concerns over jobs and earnings. Consumers’ assessment of current business and labor market conditions, however, was more positive. While overall economic conditions appear to have moderately improved, consumers are uncertain whether the momentum can be sus-

tained in the months ahead.

US durable orders

US manufactured goods moved higher in August, signaling that the factory sector improved in the third quarter. Durable goods orders rose 0.1 percent during last month, after a large 7.4 percent dropped in July mostly because demand for aircrafts fell. The durable orders report showed that shipments of non-military capital goods other than aircraft grew 1.3 percent, snapping two straight months of declines.

US new home sales

US new home sales rose in August but held near their lowest levels this year, a sign that a sharp rise in interest rates is weighing on the US economy. Sales rose 7.9 percent to an annual rate of 421,000 units following a 390,000 units the prior month. The mortgage rates rose sharply in the beginning of May when the Fed signaled it was thinking of unwinding its bond-buying stimulus program soon after the mortgage rates dropped after the Fed surprised the financial markets last week when it announced it would put off reducing monthly bond purchase program.

US unemployment The number of Americans filing for jobless benefits, dropped last week to its lowest level since 2008. The better than expected jobless data supported the Federal Reserve case to unwind its ongoing stimulus program . Jobless claims benefits dropped 5,000 last week to a seasonally adjusted 305,000.The Fed said it held back on tapering due to concerns over a still-weak labor market, although Fed Chairman Ben Bernanke said policymakers were also worried about a debate in Congress over fiscal policy. The United States Congress must raise a limit on government borrowing by midOctober or the nation could begin defaulting on its obligations soon after.

US Final Gross Domestic Product

The US economy expanded at faster pace in the second quarter from the previous three months, a sign the US was weathering federal budget cutbacks and higher taxes or otherwise what is so called the “sequester”. The gross domestic product expanded at a 2.5 percent annual rate in the April-June period.

German Ifo

German business confidence increased for its 5th straight month in September amid signs the economic recovery is continuing in the Euro Zone. The Ifo business climate index is based on a survey of 7,000 companies about how they think the situation is now, and how they see things going in the coming months.

The index edged up to 107.7 points from 107.6 in August. Market analysts had expected it to rise slightly more, to 108.0. Germany is benefiting from unemployment near a two-decade low and the end of the euro-zone longest ever recession.

The German government is depending on domestic demand to support growth this year as exports weaken. The Ifo survey strengthened those hopes by showing retailers more upbeat about their business outlook than at any point since February 2011.

Germany’s Flash PMI Germany’s private sector improved in September at its fastest rate since January, last week Germany’s Flash PMI Service index, suggested that Europe’s largest economy will grow again this quarter. The Purchasing Managers’ Index, which tracks growth in both the manufacturing and services sector and covers more than three quarters of the German economy, moved up to 53.8 in September from 53.5 in August. After shrinking in the fourth quarter of 2012 and suffering a subdued start to 2013, the German economy expanded 0.7 percent in the April to June quarter thanks mainly to domestic demand.

Last week Germany’s consumer sentiment rallied to its highest level in six years heading into October as historically low interest rates encouraged greater willingness to buy. The GfK’S consumer sentiment indicator rose to 7.1 for October beating market expectation of a 6.9-point rise. The latest polled survey indicated that the German consumers are still expecting their economy to grow further.

The ECB President Mario Draghi told the European Parliament in his quarterly testimony “We are ready to use any instrument, including another LTRO if needed, to maintain the short term money markets at the level that is warranted by our assessment of inflation in the medium term.” At the same time, Draghi said the central bank was monitoring the impact of having ultra-low interest rates for a long time, saying the central bank was “very sensitive” to risks to financial stability stemming from low rates, and would act against those risks, if needed. Acting to ensure banks had access to funds as interbank markets; Draghi introduced the twin three-year liquidity operations lifting excess liquidity to more than 800 Billion Euros early last year.

Kuwait

Kuwaiti dinar at 0.28280 The USDKWD opened at 0.28280 yesterday morning.