Weekly Recap; Welcome to the Shutdown

– For the first time
in 17 years, most of the federal government has been shut down as Congress
failed to pass a budget or a short-term funding resolution before the new
fiscal year began on October 1st. House Republicans wanted to delay or defund
Obamacare in exchange for budget funding, and were preparing to demand more
spending cuts in exchange for raising the debt ceiling later this month. There
has been little in the way of negotiations between Republicans and Democrats,
although by Friday there were faint hopes that some sort of ‘grand bargain’
could be struck that might resolve both the budget and debt ceiling issues in
one big deal. The greenback has been a big casualty of the shutdown, but
10-year yields are pretty steady around 2.6% and both the Nasdaq and S&P500
have not really suffered, although the DJIA is lower on the week. The September
US jobs report was not published, shifting attention to the ADP report, which
at +166K missed expectations of +180K. In other data, the September ISM manufacturing
report hit its highest level since April 2011, while the ISM non-manufacturing
index dropped to 54.4 after a very strong August report. For the week, the DJIA
lost 1.2% and the S&P500 shaved off 0.1%, while the Nasdaq gained 0.7%.

– By all accounts, the Republican Congressional leadership provoked the current
shutdown without a clear plan for achieving their goals. Indeed, the leadership
has significantly moved away from its initial objective of defunding Obamacare
as the shutdown has dragged on. President Obama and Senate Majority Leader Reid
have dismissed even small changes to the Affordable Care Act and have not
budged on their condition that the House pass a clean short-term funding bill
before negotiations over the debt ceiling can begin. By Thursday there were
signs that moderate Republican representatives were pressuring House Speaker
Boehner to bring a clean funding bill to the floor for a vote, implying that
they could vote with the Democrats to pass the measure. Boehner continues to
refuse to authorize a vote, but with markets looking nervous about the debt
ceiling, he has reportedly told his caucus that he will not allow the US to
default on its debt, even if raising the debt ceiling requires Democratic
votes.

– After dropping to around 2.60% from just shy of 3.00% over the course of
September, the yield on the 10-year UST has remained little changed this week.
Money managers are getting out of USTs maturing closest to the debt-ceiling
deadline and buying longer-maturity bills: one-month rates climbed as high as
0.16% yesterday, while rates on three-month bills were 0.02%, the biggest
inversion of the spread since September 2008.

– Thanks to the government shutdown, the Labor Department’s BLS did not publish
the September US jobs report that had been scheduled for Friday. The consensus
expectations were for nonfarm payrolls of +180K and an unemployment rate of
7.3%. As a result, greater attention is being paid to other employment
indicators this week. Weekly initial jobless claims were 308K, while the
four-week moving average fell to 305K, the lowest level since May 2007. The
September ADP report indicated companies added 166K to private payrolls, while
the August figure was revised to 159K from 176K prior. The employment
sub-indices in the September ISM non-manufacturing and manufacturing reports
provided direction: in the services index, employment fell to 52.7 (its lowest
level since May) from 57.0 in August, while in the manufacturing index
employment climbed to 55.4 from 53.3 in August.

– The first major storm of the hurricane season to hit the Gulf Coast has begun
disrupting energy production in the region. Tropical Storm Karen formed between
Cuba and the Yucatan Peninsula, causing oil and gas companies to start
shuttering their rigs as a hurricane watch is in effect in certain parts of the
eastern Gulf coast area. After oil traded as low as $101 on Syria’s compliance
with its agreement give up its chemical weapons, WTI crude traded toward $104
on Friday.

– In a slow month, Ford and Chrysler reported solid gains in US September sales
results. Ford sales rose 5.7% to 184K and Chrysler deliveries rose 0.7% to
143K, while General Motors sales declined 11%. A Ford sales executive said
overall Q3 industry sales rate hit its best level since 2007. The new darling
of the auto industry, Tesla, experienced its first bump in the road this week
after the video of a Model S electric sedan in a fiery accident went viral.
Shares fell 10% over two days on the media coverage of the incident, though
Tesla moved quickly to say that the fire did not reach the passenger
compartment and that the accident would have been much worse in a vehicle with
a gasoline tank.

– Twitter made public its IPO filing, revealing plenty of data about its
business and its expectations. In 2012, Twitter reported a net loss, though it
tripled its revenue to $317M, or less than one tenth of Facebook’s 2012
revenue. Twitter says it has 218M monthly active users, but it did not address
how many of those are fake accounts.

– Activist investor Dan Loeb’s Third Point Partners went after Sotheby’s this
week. Third Point hiked its stake to 9.28% and wrote a letter calling for its
CEO to step down. On Friday, Sotheby’s adopted a poison pill to deter for any
single investor from owning more than 10% of the company. It noted that
“rather than debating incendiary and baseless comments, we are focused on
serving our clients’ needs.” Meanwhile, Pershing Square’s Bill Ackman
finally eased up on his big Herbalife short, reportedly choosing to cut the
equity position by over 40% and replace it with long-term derivatives.

– The US government shutdown has weakened the greenback against most major
pairs. After trading in a 1.3460 to 1.3565 range since the no-taper September
FOMC meeting, EUR/USD moved higher, including a jolt up past 1.3600 on
Wednesday during the ECB press conference. There were no surprises at the ECB
rate decision, but Draghi’s less dovish tone aided euro strength. In addition,
Draghi reiterated that the ECB was seriously considering another LTRO.
Speculation about a possible debt limit deal or “grand bargain”
budget agreement in the US took the pair lower on Friday as UST yields started
rising again.

– USD/JPY drifted to one-month lows below the 97 handle as the shutdown
continued. Japan PM Abe confirmed that the government would hike the
consumption tax from 5% to 8% in April 2014, but there was some disappointment
after the government said it would consider cutting corporate tax rate.

– Italian PM Letta won a series of victories against Silvio Berlusconi this
week. Coming into the week, Berlusconi was threatening to pull his PdL party
from the governing coalition and topple the government over efforts remove him
from the Senate (following his tax fraud conviction). A dissident faction
within the PdL refused to plunge Italy back into crisis and offered their
support for the government in a vote of confidence, undercutting Berlusconi,
and PdL leaders instructed the party to preserve the government rather than
destroy the PdL. On Friday, an Italian Senate committee recommended that
Berlusconi be stripped of his position in the legislature. A final vote in the
full Senate is planned within the next 20 days.