EmailThe House of Representatives voted in favor of the debt ceiling raise/deficit reduction plan last night (269-161) that nobody seems to think is that great of a deal. Still, it is a good enough deal to allow the U.S. to meet all of its obligations on time. All that remains is for the Senate to vote in favor of the deal -- which is expected -- and for the president to sign the measure into law.
If only we could say "case closed" now, but unfortunately we are a long way from saying that as the structure of the deal ensures the market we will be facing big political battles on the fiscal front for some time to come.
In the end here, we will get the eleventh-hour compromise that most participants expected, but yesterday's trading and the disposition of the futures market this morning suggests there is anything but a feeling of satisfaction about the matter.
The S&P futures are currently 0.7% below fair value, so the stage is set for a weaker start.
To be sure, politics in Washington are playing a role here, but the market has other things at the front of its mind now, namely the sluggish economy and weakening earnings prospects.
The disconcerting factor is that there isn't any neat deadline, like August 2, where the economy can be cured of its maladies with the stroke of a pen.
Things might be better in three months or they might not.
The Treasury market for one appears to be placing the "under" bet on the economic outlook. The yield on the 10-year note is at 2.69% today, which is a little over 100 basis points lower from where it stood in early February and nearly 50 basis points lower from where it stood at the beginning of July.
Last week's GDP data didn't do much to inspire confidence in economic conditions; meanwhile, today's release of personal income and spending data for June simply rehashed the GDP disappointment.
Personal income rose 0.1%, which was in-line with the consensus estimate, while personal spending declined 0.2%. The latter was below the Briefing.com consensus estimate of +0.1%.
The decline in personal spending was reportedly the first decline since September 2009, and while much of this weakness was embedded in Friday's advance Q2 GDP report, it nonetheless serves as a stark reminder of the sluggish levels of economic activity in the U.S.
Strikingly, the futures market improved about six points in the wake of the release. We are not sure why, other than an expectation perhaps that the market is poised for a bounce from oversold conditions. In the last six sessions, the S&P 500 has declined 4.3%.
So, there should be an official debt deal today, yet the overriding issue is that there is now a deficit issue with respect to confidence in the economic outlook.
--Patrick J. O'Hare, Briefing.com
Patrick J. O'Hare is the Chief Market Analyst for Briefing Research, Briefing.com's institutional research service. To request a free trial please email researchsales@briefing.com.
