* Confidence in U.S. economy intact despite budget bickering
* Fed firmly on hold despite likely robust jobs report
* Nothing to write home about on euro zone economy
By Alan Wheatley
LONDON, Oct 20 If Wall Street's record high is a
signpost, the U.S. economy has every chance of pulling further
ahead of a stuttering Europe despite new battles to come in
Washington over the government's budget and debt ceiling.
Far from sapping animal spirits, the last-gasp pact to avert
an unprecedented U.S. default has raised hopes that politicians
will learn from the public's hostile reaction to the standoff.
The S&P 500 closed on Friday at an all-time peak of 1,744.50.
"There's probably more confidence now that next time around
there won't be this kind of brinkmanship, that there won't be
another shutdown and that there certainly won't be a default,"
said Ira Kalish, chief global economist for Deloitte, the
professional services organisation.
"So my expectations would be for a return of consumer
confidence and of business willingness to invest and employ," he
The 'next time around' is not far away. Congress has
approved funding for the government until Jan. 15 and has
authorised it to keep issuing debt until Feb. 7.
David Folkerts-Landau, group chief economist at Deutsche
Bank, said the episode had inflicted deep wounds on the
Republican party, which wanted changes in Democratic President
Barack Obama's healthcare reforms, and on Congress.
"As a result, chances for meaningful progress in the
upcoming budget negotiations have improved. Another government
shutdown and debt ceiling showdown next year seem less likely,"
he said in a note.
FED ON HOLD FOR NOW
Folkerts-Landau said sentiment indicators were likely to
rebound now that a deal in place, helped in part by expectations
in financial markets that the impact of the budget standoff will
cause the Federal Reserve to delay winding down its bond buying,
now running at $85 billion a month.
September's employment report will be issued on Tuesday, and
normally the 180,000 rise in non-farm jobs that economists
expect would revive talk of an early start to Fed 'tapering'.
Instead, economists suspect the Fed will not act until
December or January at the earliest because economic data for
October will be clouded by the government shutdown.
Peering through the fog, Kalish said declining weekly
jobless insurance claims suggested the labour market was in good
shape. He also took heart from rising output of capital goods.
"I'm cautiously optimistic that things are getting better
and that the fundamentals of the U.S. economy are gradually
improving," he said.
The same cannot be said with much confidence about the euro
zone. The bloc's purchasing managers' index is likely to edge up
to 52.5 in October from 52.2 in September, but bank lending to
the private sector is expected to shrink further.
Indeed, the Centre for Economic Policy Research in London
said on Saturday that it was too soon to conclude that the
17-nation single currency area had emerged from the recession
that began in the third quarter of 2011.
NO CATALYST, NO IMPETUS
Mark Cliffe, chief economist with ING Group, said he saw no
obvious catalyst for a spontaneous improvement in the euro zone.
Monetary policy was on hold, fiscal policy was exerting less
of a drag but was not providing a positive impetus, and many
issues remained to be resolved about the future of the euro.
A two-day European Union summit will tackle some of these
questions, including how to provide backstop funds to close any
failing euro zone banks - a critical component of the 'banking
union' slowly being forged to underpin the currency.
No breakthrough is expected, not least because Germany has
yet to form a coalition government after September's elections.
"Companies are still sitting on a lot of cash and are
reluctant to invest because of the uncertainties that exist in
Europe and around the world," Cliffe said.
"They're not in a hurry to hire people either, so you have a
recipe for a fairly lacklustre recovery at best," he added.
Any positive impetus would have to come from the global
economy, Cliffe said. Here, too, the news is likely to be mixed
Britain is expected to confirm continued robust growth for
the third quarter, propelled by a housing recovery in southeast
England that is generating something of a feel-good factor.
Economists polled by Reuters expect 0.8 percent quarterly
growth after expansion of 0.7 percent in the April-June period.
Japan is likely to report that exports grew at their fastest
pace in three years but that progress towards its goal of 2
percent inflation is slow despite massive monetary stimulus.
Core consumer prices, excluding fresh food but including
oil, probably rose 0.7 percent in the year to September, below
the near five-year high of 0.8 percent in the 12 months to
The HSBC/Markit purchasing managers' index for China is
forecast to post only a small rise.
Anthony Chan, Asian sovereign bond strategist with
AllianceBernstein in Hong Kong, said China's economy was likely
to lose some momentum after inventory accumulation helped to
lift the pace of GDP growth to 7.8 percent pace last quarter.
He said it was far more important to track the Communist
Party's core policies rather than worry about marginal changes
in the GDP growth rate or the central bank's monetary stance.
On this score, Chan said he was encouraged that Beijing had
not resorted to 'panic stimulus' earlier this year to ensure its
7 percent floor for 2013 growth was met.
"China should continue to be a source of stability in a
world of still very volatile and uneven growth," he said.