The Week Ahead: Dirty Old Town

by CC July 25, 2011 12:15 am • Commentary


House and Senate leaders were preparing separate backup plans Sunday to raise the federal debt limit after another day of intense negotiations failed to break a partisan impasse that threatens to throw the government into default next week.The rival strategies left Congress poised to start this week locked in bitter and messy legislative warfare, even as jittery financial markets were set to open for the first time since House Speaker John A. Boehner (R-Ohio) abruptly abandoned debt-limit talks with the White House on Friday.

So here’s the short version of what just happened, and where we’re likely to be going:

On Tuesday, the Gang of Six proposed a deal that would raise tax revenues by $2 trillion — which showed there was support among Senate Republicans for a deal that raised taxes by about $2 trillion. On Thursday, congressional Democrats rebelled over reports that the deal Boehner and Obama were negotiating had only $800 billion in new revenue, and it wasn’t even clear how those would be achieved. That night, Obama called Boehner looking for about $400 billion more in revenue to have something he could sell to Democrats. That would have brought the deal from $800 billion in revenue to $1.2 trillion in revenue. He didn’t get a call back until the next day at 5:30 p.m. — by which point the call was unnecessary. Boehner had already told the media that he was leaving the talks.

Republicans are emphasizing that the White House went from asking for $800 billion in revenue to $1.2 trillion. The word you’re hearing from them is “reneged,” but the White House emphasizes that negotiations were ongoing, and both sides were asking for more as they tried to figure out what they could both agree on and pass through Congress. Boehner, for instance, wanted further cuts to Medicaid, a trigger that would repeal the individual mandate and the Independent Payment Advisory Board if the entitlement cuts didn’t come through, and a tighter cap on discretionary spending. “They make it seem like the president made some ultimatum on $1.2 trillion in revenue,” says a senior administration official. “He didn’t. He said, ‘If you can’t do this, let’s figure out what we can do.’ ”

The “what we can do” would probably have been to ratchet back the entitlement cuts. Or maybe another solution would have been found. It’s hard to say because Boehner didn’t come back with a counteroffer. He simply left the negotiations.

But let’s zoom out on where the negotiations left off. Spending cuts would have totaled about $3 trillion, with a bit less than a trillion dollars of that coming from entitlements and other forms of mandatory spending. Revenue increases — none of which would have come from raising marginal tax rates — would have been between $800 billion and $1.2 trillion. The package would have extended the unemployment insurance and payroll tax cut provisions passed in the 2010 tax deal. All in all, that’s about a trillion dollars less in revenues than the Simpson-Bowles/Gang of Six deals advocated, and about $2.6 trillion less in revenue than simply letting the Bush tax cuts expire in 2012.

Investors will remain hesitant on buying the greenback this week, but the real problems for the currency may come instead on any downgrades of the U.S. sovereign rating, says Hiroshi Maeba, a senior FX dealer at Nomura Securities. After recent comments from ratings agency S&P concerning the need for a longer term deficit reduction plan, Maeba says “the real trouble for the dollar would be if S&P or other agencies cut their ratings on U.S. debt.” He says investors in Asia have remained relatively calm despite speculation of potential turbulence, amid statements from U.S. authorities that a technical default remains out of the question…
… Asian credit default swaps are slightly wider Monday, as investors refocus on the continued debt standoff in the U.S., following initial euphoria on the euro zone’s Greek debt deal. With U.S. congressional leaders still split Sunday on how to cut the deficit and raise the debt ceiling, time is running out to cut a deal. Until that situation is resolved, it will hard for markets to find any coherent trend, an Asia-based trader says, describing credit markets as “a bit nervous.” Spreads on the Markit iTraxx Asia ex-Japan CDS index were recently around 114-116 bps, wider than 111-112 bps at Friday’s close in Asia…
… Asian currency markets continue to reflect the expectation “that something will get cobbled together” in the U.S. to avoid defaulting on debt payments, says Adrian McGowan, head of FX trading, Asia Pacific at Barclays Capital. Markets have shown relative calm Monday despite warnings from U.S. politicians that the debt stand-off would shake them. “The market is also aware that operationally, the U.S. government likely has until about August 10” to strike a deal, McGowan adds, not the Aug. 2 date that U.S. officials have widely advertised. However, it looks increasingly unlikely that a last-minute deal will be sufficient to retain the U.S. AAA debt rating, he adds.
WSJ : The Week Ahead


Some key earnings coming from Broadcom, Netflix and Texas Instruments. Also, some regional economic news: the Texas Manufacturing Outlook Survey for July.


S&P/Case-Shiller will tell us that home prices are still lousy. Johnson Redbook’s weekly retail sales also due. And the Richmond Fed tells us what business is like in its area. New home sales and Consumer Confidence data also due out. Cheery and chipper? Maybe not so much. More big earnings from 3M, Amazon, U.S. Steel and Ford. Others reporting include Electronic Arts, Hershey, Occidental Petroleum, Valero, Biogen Idec, Novellus, Fiserv, Juniper, Ford and UPS.


Earnings start to taper a touch, with Akamai, Cabot Oil & Gas, Visa, Aetna, Dow Chemical, Nasdaq, Ryder, Boeing and Southern Co. reporting. Chicago Fed tells us what manufacturing is like in the heartland. The government reports on Durable Goods orders. Energy mandarins tell us how much crude and gasoline we have on hand.


Weekly (weakly?) initial jobless claims! July’s jobs report (Aug. 5) will start to come into focus. The pending home sales index and a Kansas City Fed manufacturing survey also on the docket. Earnings? Still some big names in the chute, including Bristol-Myers Squibb, Colgate Palmolive, Automatic Data Proc., CME Group, ExxonMobil, Chesapeake Energy, Met Life, Starbucks, DuPont, Sprint Nextel, Kellogg, Motorola Mobility, KLA-Tencor.


Get quieter (summer!) on Friday. Chevron, Amgen, Merck, Weyerhaueser, Newmont Mining and Aon report. No major economic news on the docket.