In a day light of data, following earlier released Chinese figures, the focus will remain on the implications of this week’s temporary budget agreement in the US. While this has averted the crisis of a potential default in the US for now, it should be seen as a temporary ceasefire rather than a solution.
Unless a longer-term deal is done by mid January another shutdown will start and the debt ceiling debate could reignite in early February. A bipartisan committee with members from both houses of Congress is now set to look at budget solutions and report back by mid December. However, such are the differences on policy between Democrats and Republicans that a grand budget deal seems unlikely. The best that probably can be hoped for is a muddle through type compromise solution. This means that the sequestration spending cuts enacted in March will be kept in place. As a result, fiscal policy will continue to be a drag on economic growth, although the hit to GDP in 2014 will probably be less than in 2013. Fiscal uncertainty and the data uncertainty that is a by-product of the shutdown mean that a near-term start to Fed tapering looks very unlikely. It will be very difficult for the Fed to start to cut back on asset purchases before January and there is a significant risk that tapering will be delayed beyond this. At the time of writing there is still no indication when US economic data delayed by the shutdown will be published.
Most of it it will likely come out over the next two weeks. However, as this is for September or earlier it will really be seen as old news. October numbers may be delayed by a lack of data collection during the shutdown and when it does come out it may be difficult to sort out the underlying trend from a temporary negative impact. Similarly November numbers may be impacted by a rebound effect.
So it may not be until the December data are released, which will largely only be from January onward, that we will be begin to see numbers that are free from a significant shutdown effect. •BoJ Governor Kuroda is set to speak this morning. He will likely say that policy is on course to meet his reflationary objectives. It will be interesting to see whether he has anything to say about next year’s consumption tax increase and its potential implications for monetary policy.