Morning Brief: Feb. 25th, 2013:
U.S. stock index futures signaled a higher open on Monday, despite market jitters as Congress reconvenes to decide on the $85 billion in automatic spending cuts due to take effect on March 1.
Wall Street analysts say it is increasingly unlikely that Democrats and Republicans will agree to a deal on the sequestration issue this week.
“A major effort to short-circuit the cuts does not seem in train for the coming week,” Michael Moran, chief economist at Daiwa Capital Markets America, wrote in a note on Friday afternoon.
However, Moran said commentators were exaggerating the negative impact of the sequester, with potential cuts to big-ticket items being spread over several years, rather than undertaken immediately.
“The Congressional Budget Office estimates that actual spending in the current fiscal year will decline by $44 billion (less than 0.3 percent of GDP),” Moran said.
“Certainly, the economy would be better without this added drag, and the balance of the cuts to spending authority will have to be absorbed in the future, but the sequestration does not warrant a major adjustment to the economic outlook for 2013,” he added.
Nonetheless, Moran said the prospective cuts will barely touch entitlements, which he described as the “primary” source of long-term budget problems.
Meanwhile, shares in both Asia and Europe were boosted on reports that Japan’s government is likely to nominate Haruhiko Kuroda, an advocate of aggressive monetary easing, as the next Bank of Japan chief. Investors expect that Kuroda, currently the president of the Asian Development Bank, will push for further unorthodox monetary policy measures to achieve the 2 percent inflation target adopted last month.
The Japanese yen slumped more than 1 percent against the dollar on the reports, falling to its lowest level since May 2010, while the benchmark Nikkei index soared 2 percent.
Pan-Asian shares were boosted despite soft growth data from China, where the HSBC flash purchasing managers’ index (PMI) showed growth in the country’s manufacturing sector slipped to 50.4 in February, its lowest level in four months. (PMI index readings above 50 signal an increase or improvement on the prior month, while readings below 50 indicate a decrease.)
In the U.K., markets digested news of the country’s downgrade by Moody’s Investors Service after the European closing bell on Friday. The U.K. lost its prized triple-A credit rating due to weakness in the country’s medium-term growth outlook, and an increasing debt burden.
Britain’s finance minister, George Osborne, said the downgrade would not change his austerity program, which has been blamed in some quarters for the country’s weak growth outlook.
“Far from weakening our resolve to deliver our economic recovery plan, this decision redoubles it,” Osborne said, after the downgrade.
Meanwhile, Italians headed to the polls on Sunday to vote in a national election. Polling will close on Monday at 2 p.m. London time.
Despite a closely-fought race, analysts at Citi forecast only a 7 percent chance of an inconclusive result or “hung parliament”, an outcome which could cause instability in the markets. Milan’s FTSE MIB traded 0.85 percent higher in early trade on Monday.
In the U.S., companies posting earnings before the start of trade on Monday include home improvement chain Lowe’s and auto rental firm Hertz.
In addition, the U.S. Treasury is set to auction $35 billion of 2-year bonds on Monday. The Treasury will auction a total of $99 billion in 2-year, 5-year and 7-year notes by the end of the week.
No major economic reports are due on Monday; the Chicago Federal Reserve’s national activity index for February will be released at 8:30 a.m. New York time.
Later in the week, Federal Reserve Chairman Ben Bernanke will deliver his semiannual testimony on monetary policy to the Senate Banking Committee on Tuesday, followed by an appearance before the House Financial Services Committee on Wednesday. Traders say leaked reports that Bernanke has downplayed worries that quantitative easing is spawning asset bubbles helped lift markets last week.