US Government shuts down, Italy's the next to go?

• Non-essential parts of the US government to shut as of today

• Letta clinging on before tomorrow’s confidence vote

• Manufacturing PMIs due from around the world

The political funfairs in Italy and the United States show no sign of resolution as we open up in Europe this morning. Assets have remained stoic in the Asian session with equities steady, although the dollar has remained on the back foot as investors punish Congress for their inability to find an agreement over budget spending. As of 5am BST this morning, non-essential portions of the US government have begun shutting down and some 80,000 workers will remain unpaid until a deal is struck.

With that in mind, we can definitely kiss any thoughts of an October reduction in asset purchases goodbye.

Following September’s meeting that kept the flow of Treasury debt and mortgage backed security purchases at $85bn a month, the market has had to reappraise its thoughts as to when the eventual, necessary reduction would take place. Those of the economic fraternity that were the most bullish on the US’s economic prospects – or most worried about the Federal Reserve’s growing balance sheet risk – had looked to October as the right time.

We are still unsure whether the Bureau of Labor Statistics will release Friday’s Non-Farm Payrolls numbers. Analysts are looking for a close to trend expansion of 180,000 jobs in September. This follows five consecutive months of improving jobs figures, but a rate of improvement that has slowed.

In Italy the situation seems maybe even more convoluted. Despite Berlusconi managing to force a crisis upon Enrico Letta’s government by asking five members of his Forza Italia party that served in the coalition cabinet to resign, there is a chance that he has lost control of this particular runaway train. There is a chance that Letta may be able to corral support from the disaffected former ministers but at the moment this seems to be nothing more than wishful thinking. Unfortunately, it does not seem that Letta will have the votes tomorrow in the Senate. The decision to raise VAT in Italy did pass however and will increase by one percentage point as of today.

Overnight we have seen sales taxes increased in Japan as well, although the actual implementation will not take place until April of next year. Shinzo Abe will push Japanese VAT to 8% from 5% in the first rise since 1997 but will also launch a stimulus plan to counter the effects. This would take the form of larger tax rebates for companies that decide to raise wages, incentives for capital spending, cash payments to homebuyers and infrastructure investment for the Tokyo 2020 Olympics.

As it is the first day of the month, and also of the new quarter, we are expecting surveys of manufacturing strength from around the world. China’s figure of 51.1 has once again disappointed estimates of a rise to 51.6 while gains have been seen in Taiwan, Vietnam and Indonesia. European figures should also remain around the 50.0 that delineates expansion and contraction, and obvious close attention will be paid over the Italian and French numbers in particular. The UK figure is due at 09.30 with the market looking for 57.5, the 7th consecutive month of improvement and the 6th of growth.

Likewise, US data is due at 15.00 BST but unfortunately the recent ISM numbers have shown growth levels not reflected in the most current GDP figures. This is likely to be a result of ‘fiscal drag’ – the problem that sees government spending fail to make-up for the savings decisions of US consumers. Once this fiscal austerity starts to recede, the US growth picture should be returned to its true position of strength.

Have a great day.

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