Market Week: October 21, 2013

The Markets

Near-debt experience: The ceasefire in Washington that put federal employees back to work and averted a debt ceiling disaster also brought relief on Wall Street. One-month Treasury yields had skyrocketed in October as investors abandoned them; that sell-off reversed after a deal was announced, cutting the yield in half overnight and to one basis point by week’s end. Long-term debt saw less impact, but equities rallied strongly. The S&P 500 built on a 1.4% gain on the day of the announcement by hitting a new all-time closing record on Friday. The small caps of the Russell 2000 also set a fresh record, and along with the Nasdaq gained roughly 3% over the three post-announcement closes. However, the Dow was hampered by disappointing earnings reports from a couple of its key components.

Last Week’s Headlines

• After 16 days of partial government shutdown and debt ceiling gridlock, a last-minute agreement broke the impasse the day before the Treasury was scheduled to begin running out of cash to pay the nation’s bills. The legislation suspends the debt ceiling until February 7 and provides funding to reopen the government through January 15. The deal to end the stalemate also established a congressional budget  conference that must report by December 13 on ways to address longer-term budget issues.

• Growth in the world’s second-largest economy accelerated in the third quarter, according to China’s National Bureau of Statistics. The 2.2% increase from Q2 on an annualized basis would represent a 9.1% annual growth rate, higher than the actual 7.8% increase seen over the past year. The increase was attributed to the effects of massive lending in the first two quarters as well as government spending on urban infrastructure in an attempt to counteract a slowdown earlier in the year.

• Manufacturing reports from the Federal Reserve’s Philadelphia and Empire State regions were mixed. The Philly Fed index edged down to 19.8 in October from September’s 22.3, and the Empire State’s outlook on general business conditions fell 5 points to 1.5. However, new orders were up in both regions.

• The Federal Reserve’s beige book report, based on data collected before October 7, showed “modest to moderate” expansion.  Businesses were said to be cautiously optimistic about future activity, but the report registered an increase in uncertainty because of the government shutdown and debt ceiling debate. Several of the Fed’s 12 districts noted caution about expanding payrolls because of uncertainty about implementation of the Affordable Care Act and fiscal policy in general, but demand for skilled labor remained high in many districts.

• The lack of government data meant that the Conference Board’s index of leading economic indicators and the Federal Reserve’s industrial production numbers for October were not available.

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