Congress did compromise on a three-month extension of the debt ceiling as President Trump sided with the Democratic Party. Not so much kicking a can down the road, but shoving it slightly with the side of the foot. Barron’s reported that this deal will mean that the issue will arise again before the year end and that it will be a continued distraction for any tax reforms. They believe that this short-term deal on the debt ceiling, and will only increase the rift between the president and Congress, one could question if that was possible.
Equity markets, as has been the trend recently, had a sharp selloff for a day then quietly crawl their way back up again, remaining within current trading ranges. Likewise, the Vix index spikes, calm returns and the index quietly creeps back down. Bonds tell a different story to equities as ten-year US Treasury yields, which fell on concerns a deal may not be reached appeared less impressed with the news, as prices hardly moved. By later Thursday yields on the ten-year treasury had fallen to a new low for the year of 2.05%. This was despite a better than expected piece of economic news in the form of a reading for the service sector purchasing managers survey for August.
A flattening yield curve, i.e. a closing of the gap between the yields of longer and shorter dated bonds, can indicate the bond market is anticipating an economic recession in the coming months. John Auther’s highlights a report from Miller Tabak’s Paul Shea who expresses the view that flattening curve has increased the possibility of a US recession in the next 24 months from 13% to now be over 20%. On reflection, not sure that put a one in five chance that the US might enter a recession in the next 2 years adds a great deal to the sum of world knowledge.
Ahead of the ECB rate meeting the latest estimate for euro area GDP for the second quarter was released on Thursday. There was a modest revision upwards to growth from 2.2% to 2.3%. The meeting itself decide to leave interest rates as they were, as expected along with the asset purchase program. The ECB did however, marginally lower their inflation forecasts for 2017 and 2018 in response to the stronger currency. There was a reasonable expectation that Mario Draghi will attempt to talk the euro down at Thursday’s meeting. Try as he might he failed to weaken the currency despite reiterating his view that substantial accommodation is still required. The strength of the euro is probably as much due to the recovery in the euro area as the lack of love for either the pound or the US dollar. When questioned further about the monetary policy of the ECB going forward, he replied that the central bank will make the bulk of its decisions in October. Just proving that shuffling cans on Thursday was just not the domain of congress.