Debt Ceiling Negotiations Drag On, House Vote Halted

Optimism from improving us jobs figures was washed away by downgrade warnings and debt ceiling drama. JPY and GBP were the top performers while AUD and NZD lagged but overall moves were small. The market is awaiting a debt ceiling vote and a slate of Japanese data. Also the status on Thursday's latest trades.

Initial jobless claims boosted sentiment in early New York trading as claims fell to 398K from 422K and beat the 412K expectation. It was the lowest reading since April and may have been even better than it looked because without seasonal adjustments, claims fell by more than 100K.

The S&P 500 rose as high as 1316 in the first hours of trading but declined late in the day and closed near the session lows at 1301, down 0.3%. The risk trade in currencies followed a similar pattern.

Sentiment worsened after S&P sovereign-rating chief John Chambers re-emphasized the importance of $4 trillion in savings. Both parties are currently proposing less than $3 trillion in savings.

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Republicans postponed a vote on Boehners debt ceiling plan minutes before it was scheduled, likely because they did not have the votes in their own caucus to pass it. In any case, the legislation had no chance of getting by the Senate or the White House, so the delay could be helpful for negotiations. A vote is expected later in the evening but it is unlikely to move markets.

VP Biden is said to be in talks with Senate Republican leader Mitch McConnell on a deal. McConnell earlier said THE ONLY REAL STICKING POINT between the two sides is a Republican insistence on a two-stage ceiling increase process.

MNI reports that the Treasury will begin prioritizing payments on Aug. 2, with bondholders at the top of the queue. A plan will be released Friday after the market close. There is talk of large-scale redemptions in money market funds if the US hits the default limit. This could potentially have cascading consequences. Its unlikely, but its a risk. There are also reports that a short-term debt limit extension may be possible if no agreement can be reached.

Asia-Pacific Preview

A broad slate of economic data from Japan will be released at 2330 GMT including CPI, employment and household spending. Industrial production will follow 20 minutes later. All the data is for June.

Retail sales handily beat expectations yesterday so there is an upside bias in household spending. Expectations are for a 2.3% y/y contraction, which will be the ninth straight decline.

Unemployment is expected to rise to 4.6% in June from 4.5%. Data from the prefectures hardest hit by the tsunami has not been included since March.

Core CPI is expected to rise 0.5% y/y but a benchmark revision on Aug. 12 is forecast to shave 0.72 percentage points and show that deflation is continuing. Its difficult to strategize around these numbers because of potential skews from the disaster but overall we expect a straightforward reaction with JPY strength on upbeat growth numbers.