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Washington Drama in the Spotlight

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Monday, September 23, 2013

The looming budget battle in Congress and continued uncertainty about the future of the Fed’s QE program provide the backdrop for today’s trading action. Beyond the U.S. shores, Germany’s Angela Merkel appears to have won the weekend vote and fresh data out of China is indicating growing momentum in that country’s economy.

The partisan deadlock in Congress is the major cloud on the market’s horizon at present. There are two issues here, a budget measure that will keep the federal government funded and raising the nation’s debt ceiling. The budget measure needs to be passed before the end of the month, failing which we will have a government shutdown. This partisan Congressional deadlock appears to be the main reason why the Fed held off on the Taper announcement at last week’s meeting. The market will be paying special attention to speeches by a couple of key Fed officials to get a better sense of the central bank’s thinking.  

Positive factory sector data out of China raise hopes that the country’s economy is on a rebound and the slowdown phase may be behind us. The preliminary September PMI from HSBC Holdings (
) rose to 51.2 from August’s 50.2 level, with gains in new orders, exports and backlog. This private sector PMI index has generally more credibility than the competing measure from government sources, which also showed gains in Augsut. China’s economy expanded at 5.5% rate in 2013 Q2 after Q1’s 7.7% pace, raising concerns initially that GDP growth may fall below the government’s target of  7.5% in Q3. But those concerns have eased lately, with a host of recent data including retail sales, industrial production, and exports largely on the positive side.

Sheraz Mian
Director of Research

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