Busch: 5 Things You Need to Know This Week
1. Ireland was bailed outafter making a disastrous decision to guarantee all bank debt during the 2008 financial crisis.
The problem: we still don’t know what haircut (30c, 20c on the $) junior bondholders will take on the bank debt.
This is one of the reasons the Euro didn’t keep its gains on the news, why CDS for Ireland (and Europe) haven’t improved and why European stocks are down 1%. Remember, there was a poll out over the weekendin Ireland that showed a majority (57%) approve of a default.
2. So far, there have been no incidents between North and South Koreas as the US-SK joint military exercises proceeded. South Korea’s Lee said North Korea will pay a price in case of further provocations. Tensions remain very highand it’s clear that the North will not give up their nuclear weapons without being forced to do so. It’s also clear that the North needs food and is pressuring the Obama administration to compromise. The South Korean won has appreciated slightly on the lack of military action.
3. The US municipal market remains under pressure due to uncertainty over the extension of Build America Bonds (BABs) and large issuance into year end. Over the last two weeks, mutual fund investors have dumped over $5 billion in municipal assets which is the largest outflow since January of 1992. Issuance for this week is expected to be 52% higher yoy with Illinois and Chicago potentially selling debt.
4. US employment data is expected to show growth of 145k in nonfarm payrolls and the unemployment rate is expected to remain at 9.6%. However, weekly jobless claims numbers are showing better than expected drops and therefore the risk is for a stronger than expected number for US job growth. Over the last month, better than expected jobs data along with solid economic data have driven US yields higher. This has also made the Fed’s initiation of QE2 look circumspect and the bond market is voting with their feet. Should we see a NFP print above 200k; the markets will continue to sell long date US bonds.
5. Congress returns this week to engage in several votes on extending the Bush Tax Cuts. You can expect several “test” votes on variations of the extensions from a vote to extend all cuts permanently to a vote to only extend for those under 200k temporarily. This is the process by which Democratic and Republican leaders can see where their members stand and what will be the ultimate compromise. As always, this situation will come down to the Senate and getting to 60 votes to cut off debate. Ultimately, the deal will be for a temporary extension for all taxpayers for 3 years with a risk that Tea Party members don’t go along with the vote. Congress wants to wrap up the lame duck by December 6th. Therefore, you can expect a vote on that date to pass the bill.
Andrew B. BuschDirector, Global Currency and Public Policy Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a frequent CNBC contributor. You can comment on his piece and reach him hereand you can follow him on Twitter at http://twitter.com/abusch.