RWC’s Stuart Frost shares his team’s view on the world
Another week of ‘cliff on, cliff off’ in the US saw little progress towards a viable agreement.
The deal reportedly proposed by Timothy Geithner late last week was swiftly rejected by Republicans as not serious.
Neither party has yet come to the negotiating table offering large enough concessions to induce the other side to make some genuine concessions of their own.
In reality, the fiscal cliff is more of a slope than a sharp drop; the full extent of the tax hikes and spending cuts will not be felt immediately but rather cumulatively over the course of 2013.
Moreover, the Treasury should be able to delay the direct effects of the fiscal cliff for a couple of months. Our immediate concern is therefore the negative effect that fiscal ambiguity will have on consumer and particularly business confidence, which is already feeding through into some of the US data. In markets, heightened uncertainty should continue to support USTs for the time being.
Compounding the fiscal cliff concerns, let us not forget that a deal to raise the debt ceiling must also be brokered as soon as possible.
The latest from the US CBO is that the Treasury will be able to stave off bumping up against the ceiling until the end of February. Perhaps the most we can hope for before Christmas is that a fiscal cliff deal ‘lite’ is agreed, which postpones the cliff beyond January and raises the debt ceiling but pushes most of the difficult decisions back until after inauguration.
Then there is the final FOMC meeting of the year. Operation Twist is due to expire this month and the expectation is that the Fed will announce QE4 – further buying at the long end of the US curve – to maintain the flow of treasury purchases.
Weaker data between then and now will serve to reinforce this expectation. Having said that, a poor non-farm payrolls reading may well be dismissed as hurricane-related noise.