WEEK IN REVIEW "The Debt Threat"

WEEK IN REVIEW

Markets were volatile again, sliding and then rallying Thursday, with the S&P 500 Stock Index posting its largest one day gain since 2 January on signs of a deal to lift the US debt ceiling. Negotiations over a possible resolution continued Friday. Meanwhile, there was uncertainty over whether the US government shutdown would continue into a third week despite the growing economic pain it is causing. Efforts to strike a debt deal continued amid concerns over the far greater economic and financial risks associated with a US debt default. Even so, it appears that any deal would resolve little and only push back the debt ceiling deadline by another six weeks. This would, however, allow time for more far-reaching fiscal negotiations under less pressure. 

Almost overshadowed by all this was President Obama’s historic nomination of Janet Yellen as the first chairwoman of the US Federal Reserve, ending months of speculation over who would fill the post. US jobless claims rose sharply, partly as a result of the government shutdown. Global economic reports highlighted Japan’s shrinking current account deficit, the United Kingdom’s soaring housing market and China’s efforts to promote the usage of its currency in global commercial and financial transactions.


President Obama made history with his choice of Janet Yellen to head the Fed. The nomination is widely supported by economists, investors and Democratic politicians. The market rallied last month when the other contender, Former US Treasury Secretary Lawrence Summers, seen as less of a monetary dove, withdrew his name. Yellen is expected to continue the Fed’s accommodative monetary policy, begun under former chair Ben Bernanke in response to the fiscal crisis in 2009. She is respected for her academic credentials and experience as vice chairwoman of the Fed. Yellen is noted for her emphasis on job creation, which she considers even more important than combating inflation, and she is expected to provide continuity on Fed policy at a critical time.


The number of US workers filing initial claims for unemployment benefits jumped by 66,000 to a seasonally adjusted 374,000 in the week ended 5 October, reflecting the impact of the federal government shutdown and ongoing reporting problems as California converts to a new computer system. An estimated 15,000 new claims were related to the federal shutdown. The four-week moving average of claims rose by 20,000 to 325,000.


US consumer sentiment and retail sales, economic indicators that had looked rosier earlier this year, both fell in the most recent periods reported. The Thomson Reuters/University of Michigan’s preliminary reading for October fell to 75.2 from 77.5 in September. This was the gauge’s lowest number since January, indicating the early impact of the government deadlock and shutdown. Retailers reported disappointing sales results in September, raising concerns about the critical holiday shopping season. The nine retailers tracked by Thomson Reuters posted 1.6% growth in September same-store sales versus a year earlier, falling short of the 3.1% consensus estimate and the 5.5% annual increase in 2012. Gap reported a 3% decline, clothing retailer Buckle posted a 4.5% drop in sales and L Brands, formerly Limited Brands, reported a 1% gain in same-store sales.

UK house prices rose faster than they have in 11 years in September, and home sales reached a four-year high. The country’s housing market is expected to receive another boost from a government-supported mortgage guarantee program beginning this week.


Japan’s current account surplus shrank much more than expected in August from a year earlier, as the country’s huge trade deficit exceeded returns from overseas investments. The current account surplus fell 63.7% to ¥161.5 billion ($1.67 billion) before seasonal adjustment, much less than the ¥540 billion-plus economists had expected. Japan’s trade gap grew by 34% from a year ago.

China sped up plans to internationalize its currency, the yuan, or renminbi. The People’s Bank of China signed a bilateral currency swap agreement with the European Central Bank. The deal covers three years and has a maximum size of 350 billion yuan or €45 billion ($60.8 billion). It is the second-largest Chinese currency swap deal. China is seeking to promote the usage of the yuan in global commercial and financial transactions.

German factory orders fell unexpectedly in August, exposing the fragility of the eurozone economic recovery. Orders — adjusted for seasonal volatility and inflation — fell 0.3% from July. While domestic factory orders rose 2.2%, foreign demand fell 2.1%.


Canada’s unemployment rate fell to 6.9% in August from 7.1%, the country’s lowest jobless rate since December 2008. However, new jobs fell to 11,900 from 59,200 the previous month, and 21,400 workers ages 15 to 24 left the labor force.