Sunday, October 20, 2013

After Extending Debt Ceiling, What's NEXT !!!

The US overcame a political impasse on its ever increasing debt limit but the deal struck by US policymakers is merely a temporary solution.

In a few months’ time from Oct 2013, we will be faced with yet another round of the same cycle, as the US government is expected to run out of money to pay its bills again by mid-January 2014. This will certainly pose the threat of another round of government shutdown, unless policymakers in the world’s largest economy really get their act together to resolve this complicated matter.

The US Congress’ passed a bill in mid Oct 2013 to end the 16-day government shutdown and raise the country’s US$16.7 trillion (RM52.55 trillion) debt limit. The temporary deal will fund the US government operations until Jan 15 2014, and extend its debt limit through Feb 7, 2014.

The traditional US January 2014 blues will be heightened by concerns that there could be a repeat of Oct 2013’s political farce.

However observers opine that the temporary measures agreed upon to keep the federal government running until Jan 15 2014 and lift the debt ceiling until Feb 7, 2014 is not likely to lead to another round of political brinkmanship.

Firstly, the Republicans have taken a beating in the opinion polls, and although they have put on a brave face, they are unlikely to force another stand-off. Secondly, there is now (Oct 2013) more scope for the Treasury to extend the debt ceiling as political campaigning for the mid-term elections in November 2014 would well be underway by then and “both sides would like the debt ceiling can to have been kicked further down the road.

Market optimism has also been tempered with the Oct 2013 assessment of the US economy by the Federal Reserve’s (Fed) Beige Book, which noted that there was only “modest to moderate” growth overall, with “an increase in uncertainty” due to events in Washington.

Clearly, just as the debt ceiling issue has been pushed back by a few months from Oct 2013, so has the likely start of the Fed tapering of the QE.

The Federal Reserve will likely delay bond purchase tapering until March 2013, possibly even June 2013, following the political brinkmanship and shutdown of the US government which has “delayed, distorted and depressed.

The shutdown will have depressed US growth as although workers will receive back pay and contractors can get back to work, there will be many who have lost out on spending that will not return.

Estimation that the political shenanigan in Washington has cost the US economy US$24bil, or about 0.6% off annualised GDP for Q4, is likely on the high side.

Meanwhile a wave of U.S. economic data is set to hit financial markets in coming week.

US Labor Department would release its employment report for September 2013 on 22 Oct 2013 as it provided a fresh schedule for some data that had been delayed by the 16-day partial government shutdown.

Among other data was the consumer price index for September, which will now be released on October 30 2013, and the producer price index for September, now due on October 29 2013.

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Please note that all data given are merely blogger's opinion. It is strongly recommended that you do your own analysis and research before investing.