barclays on debt ceiling

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RESEARCH | GLOBAL MACRO DAILY | NEW YORK OPEN 2 August 20

PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES STARTING AFTER PAGE 11

Global Macro Daily

The House approved legislation to raise the US debt ceiling by $2.1trn and the

legislation now goes to the Senate for a final vote later today.

Market Insights and Events

Global

Europe

Asia Pacific

North America

EEMEA

Latin America

The next 24 hours

Europe

North America EEMEA

Latin America

Calendar

Contacts

The debt deal does not stabilize the debt-GDP ratio, however, and does not appear

to meet the criteria laid down by rating agencies to avoid a downgrade. We

maintain our recommendation of Treasury curve steepeners. However, given the

extent of steepening of 5s30s curve, we recommend 10s30s curve steepeners

instead (see FOCUS below).

Global manufacturing confidence indicators have disappointed in the past 24

hours. The ISM manufacturing index fell to 50.9 in July from 54.5 in June, well

below expectations. The reading was the lowest since July 2009, suggesting aweak start for growth in Q3. Full Story

The headline euro area manufacturing PMI was unrevised at 50.4 in July. The

main "new news" in the release came from the peripheral countries: in particular,

the sharp deterioration in Spanish PMI. Full Story

In light of the weak manufacturing confidence indicators, the upcoming Services

PMI numbers (Wednesday for Europe and the US) are likely to draw additional

attention, with a potentially larger-than-usual impact on cyclical assets.

Focus

Not Good Enough

Ajay Rajadhyaksha, Anshul Pradhan

Policymakers in Washington have agreed on a deal that a) raises the debt ceiling until

after the November 2012 elections, and b) cuts the deficit by around $900bn in the first

step, with triggers that would add another $1.2-$1.5trn in cuts in the second stage in

the absence of an agreement to cut deficits by at least that amount. Our first reactions:

This deal does not put the US on a sustainable fiscal path, since it does not stabilize

the debt-GDP ratio over the next decade. Moreover, the recent weakness in US

growth has the potential to offset most of the savings claimed by the debt reduction

package.

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Barclays Capital | Global Macro Daily

2 August 2011 3

However, what matters far more than the rating agency move is whether bond markets

come to the same conclusion about US debt. The 5s/30s curve (where we have

recommended a steepener since April, when S&P put the US on negative outlook) is a good

place to start. The 5s30s curve has steepened by nearly 55bp since early April. A substantial

part of the move has been due to weaker data leading to expectations of Fed hikes being

pushed out. But some of it seems to be driven by fiscal concerns. The 10bp narrowing of

30y swap spreads over the same period and the nearly 25bp of cheapening of 10y USTreasuries relative to 10y bunds support this theory as well. In previous research (see "How

risk-free are US Treasuries?", January 8, 2010), we estimated the effect of a one-notch

downgrade in the sovereign rating to correspond to an increase in yields of about 25bp. The

moves so far suggest that the effect of such a downgrade has been priced in to a large

extent, although long-end swap spreads appear to have further room to tighten.

Given that the current plan does not solve longer-term fiscal issues, we do not expect a

reversal of the 5s/30s steepening just because a deal has been passed. But the large move

that has already occurred means that we find the entry level to be unattractive for 5s30s

steepeners. In addition, there are a couple of other risks to 5s/30s steepeners. The

weakness in data could put QE3 back on the table. Brian Sack, the markets group chief of

the New York Fed, has suggested that monetary accommodation could be achieved by theFed’s extending the duration of its portfolio. This would put downward pressure on long-

end rates, hurting the 5s/30s steepener. Even if the Fed were to stay on hold in the face of

disappointing data, 5s might well be anchored near current levels, given how much they

have rallied. We recommend moving the steepening out to 10s/30s instead. That part of the

yield curve has steepened considerably less than 5s/30s, and any new asset purchases

should affect the entire 10-30 year sector, reducing the risk of flattening.

Figure 2: Growth is expected to track well below the CBO’sestimate in 2011…

Figure 3: …which would lead to a worsening of deficits,

offsetting the bulk of the savings

1.50%

2.70%

3.10%

2.80%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

2011 Q4/Q4 2012 Q4/Q4

19

4348

5764

7178

8491

98105

0

20

40

60

80

100

120

2011 2013 2015 2017 2019 2021Barclays CBO Additional Deficits for 1% lower growth in 2011

Cumulative Additional Deficits (2011-2021) = $755bn$bn

Source: CBO, Barclays Capital Source: OMB




2 August 2011 4

MARKET INSIGHTS AND EVENTS

Global

Global Manufacturing PMIsAroop Chatterjee

Global manufacturing PMIs show a continued slide in activity into July with very few

exceptions. Slowing global activity may provide a bid for currencies with more closed

economies, such as the USD and the JPY. Other traditional safe havens, such as the EUR and

the CHF, may underperform, given their more open economies. There are risks to consider

for the USD and JPY, primarily stemming from potential policy action. Full Story

Europe

Italy: July central government budget data

Fabio Fois

Central government budget data show a surplus of EUR4bn in July, compared with a surplus

of EUR2.5bn recorded in July last year. In a note published on its website, the Italian

Treasury reports that, net of transfers made to Greece, the surplus would have been of

EUR5.0bn. YTD, the state sector borrowing requirement was EUR39.6bn versus EUR44.7bn

recorded in 2010. Full Story

French, Italian and Spanish new car registrations: Momentum remains

tentative

Marion Laboure, Julian Callow

French, Italian and Spanish new car registrations: Momentum remains tentative. Based on

our seasonally adjusted calculations, we find that the pace of new car registrations in July in

France, Italy and Spain continued to be weak, reflecting the ongoing concerns of

households towards making big-ticket expenditures. While French registrations in SA terms

in July were slightly above their Q2 average, our calculations suggest that the Italian and

Spanish registrations were weaker. Full Story

Swiss PMI (sa) at 53.5 in July, marginally up m/m

Thorsten Polleit

In July, the Swiss PMI (sa) stood at 53.5, marginally up from the 53.4 reported for June

(market consensus: 52.5, BarCap: 51.1). This is actually somewhat surprising given thelatest decline in the KOF index (which fell 0.19 points m/m to 2.04 in July) and growing

concerns about the potentially dampening effects the appreciating Swiss franc exchange

rate could have on growth. Looking at the PMI breakdown, output rose strongly to 51.5

from 46.6 in the previous month. Full Story















2 August 2011 5

German VDMA orders lost further momentum in June

Thorsten Polleit

In June, German total VDMA plant and machinery orders fell 2.4% m/m after a 2.2% m/m

retreat in May. The 3m/3m rate stood at -2.3% after -2.2% in the previous month. Clearly,

the June VDMA data suggests the German recovery has been losing quite some momentum

since February this year - with the total VDMA order level down 8.3% up to June. Full Story

Euro area headline PMI unrevised, but divergences continue to be manifestat the country level

Julian Callow

The headline euro area manufacturing PMI was unrevised at 50.4 in July, while the gap

between the diffusion orders for new orders and finished goods inventories was revised to a

slightly weaker -1.3 from -1.0 previously. As we observed when the "flash" data came out,

these are the weakest readings since Sept. 09 (headline) and April 09 (gap). The main "new

news" in today's release came from the peripheral countries: in particular we are struck by

the particular deterioration in the Spanish PMI. Full Story

UK manufacturing sector posts decline

Blerina Uruci

The manufacturing PMI was significantly weaker than expected in July, dropping 2.3 points to

49.1 (BarCap: 50.5, consensus: 51.0). The index fell below the 50 point mark, which indicates

falling activity, for the first time since July 2009; although it had been on a downward trend for

the past six months after reaching an all-time high of 61.6 in January. Full Story

Asia Pacific

Australia: RBA considers a rate hike, but remains on sidelines, for now

Gavin Stacey, Joaquin Vespignani

The statement that accompanied the rate decision was slightly more hawkish than July's

statement, with the RBA showing more concern about the medium term inflation outlook.

We believe that the RBA has acknowledged that domestic conditions seem supportive of an

interest rate hike. However, the only factor holding this decision back is the growing

uncertainty in global financial markets. Full Story

Japan auto sales suggest recovery moving into cruise control after earlier V-shaped turnaround

Kyohei Morita, Yuichiro Nagai

New auto sales (new passenger vehicle and minis) fell a seasonally adjusted 7.4% m/m in

July, their first decline in three months. After a V-shaped recovery in May and June following

the earthquake, auto sales may now be shifting into "cruise control." Assuming flat m/m

readings in August and September, however, they are still on pace to increase 9.7% q/q in

Q3. In this context, we believe consumption will turn up q/q in Q3 after contracting in Q2,

supporting our outlook for economic recovery through Q1 12. Full Story














2 August 2011 7

Congressional Budget Office scoring of compromise to raise debt ceilingindicates plan cuts at least $2trn from deficits over next 10 years

Troy Davig

The Congressional Budget Office (CBO) scoring of the proposed compromise to raise the

debt ceiling indicates that, over a ten-year horizon, deficit savings from already agreed upon

discretionary spending caps would culminate in $917bn relative to the CBO March baseline.Other measures, which will come from either recommendations from a Congressional Joint

Select Committee or automatic spending cuts, would result in over $2trn in deficit savings

over the next 10 years. Full Story

Lowest US ISM reading since July 2009

Peter Newland

The ISM manufacturing index fell to 50.9 in July from 54.5 in June, well below our forecast

(55.0) and the consensus (54.5) and the lowest reading since July 2009. The decline was

broad-based, with new orders down to 49.2 from 51.6 (the first reading below 50 since the

recession); production falling to 52.3 from 54.5; and declines in supplier deliveries (to 50.4

from 56.3), employment (to 53.5 from 59.9), and inventories (to 49.3 from 54.1). Full Story

Small increase in US construction spending

Michael Gapen

Construction spending rose 0.2% m/m in June, in line with our forecast (0.2%) and one-

tenth above the consensus (0.1%). The upside surprise also came with an upward revision

to May's numbers, where construction spending was revised to show an increase of 0.3%

against the previous 0.6% decline. The increase in June was driven by a 0.8% increase in

private construction spending, while public construction spending fell 0.7%. Full Story

US Debt Ceiling Deal: Not good enoughAjay Rajadhyaksha, Rajiv Setia, Anshul Pradhan, Amrut Nashikkar

Policymakers have agreed on a deal cutting $2.1-2.4trn in deficits over the next 10 years,

which, in our view, does not stabilize the debt-GDP ratio. Further, this debt profile does not

appear to meet the criteria laid down by rating agencies, and could act as a trigger for a

downgrade. We maintain our recommendation of Treasury curve steepeners. However,

given the extent of steepening of the 5s30s curve, we recommend 10s30s curve steepeners

instead. Full Story

US Fixed Income Outlook for August 2, 2011

Ajay Rajadhyaksha, Dean Maki

Over the weekend, the Democratic and Republican leaderships coalesced around a plan to

increase the debt ceiling that would cut $2.1-2.4trn in spending and raise the ceiling until

after November 2012. We think this proposal falls short of the threshold set by S&P and

does not stabilize the debt-to-GDP ratio over the next decade. We recommend 10s30s

curve steepeners on lower-than-expected growth and a lack of resolution for longer-term

fiscal issues. Full Story














2 August 2011 8

EEMEA

Emerging EMEA PMI: A cooler summer

Daniel Hewitt, Eldar Vakhitov

July manufacturing PMI in Emerging EMEA has continued the downward trend observed in

Q2 11. Average PMI declined by 2.1pts to 50.8 in July, well below the averages of 53.7 in Q2and 56.2 in Q1. However, most of the decline in July was attributable to strike-induced

declines in South Africa. Still, without South Africa, average PMI fell by 0.6pts to 52.1, more

than a point below its Q2 average. Full Story

South Africa: Massive deterioration in July PMI

Jeffrey Schultz

South Africa's seasonally adjusted PMI fell massively, to back below the critical level of 50, in

July, measuring 44.2 vs 53.9 in June. This marks the lowest level in the index since August

2009 and follows a host of global PMI's over the past few days which suggest somewhat of

a "soft patch" in global manufacturing activity. Strike action along with weaker global

activity heavily impacted July PMI. Full Story

Turkey: Sober market assessment to the military resignations

Koon Chow

The negative market impact from last Friday's high-level resignation from Turkey's military

has started to abate. Investors' concerns that the resignations may negatively impact

political or social stability in Turkey should steadily ease although the Supreme military

council meetings this week (biannual meeting between the PM and senior military officials)

are still likely to be a focal point for the market. The popularity of the ruling AKP party has

been consistently high, lessening the risk that the resignations trigger a popular backlash

against the government. Full Story

Latin America

Venezuela: 2031 allocations signal lower-than-expected supply

Alejandro Grisanti, Alejandro Arreaza

The allocations of more bonds to the public financial systems, means lower supply in the

shorter term and higher supply in the medium term, as the allocation to the public financial

system will be sold through SITME. This allocation also supports the view of no more issuance

during the rest of 2011, which is very supportive to the Venezuelan assets Full Story

Argentina: August 14th

Sebastian Vargas

City of Buenos Aires Mayor Mauricio Macri was re-elected on Sunday night. He garnered

more than 64% of the votes against President Cristina Kirchner's candidate, Daniel Filmus.

We see the result as negative news for Kirchner, suggesting the opposition has momentum,

but believe the Aug 14 primaries will be an important political and market event, as they will

provide fresh information on whether Cristina Kirchner's chances to win in the first round

are as high as the market currently seems to expect. Full Story














2 August 2011 9

THE NEXT 24 HOURS

Europe

Euro area – Retail sales: We look for euro area retail sales to have risen by 2.0% m/m in June (-

0.6% y/y), after a fall of 1.0% m/m (-1.8% y/y) in May. However, this estimate is very tentative

and is likely to be revised down, since it encompasses the provisional German estimate (+6.3%

m/m) which was inflated by a new statistical sample, and which is also very likely to be revised

down sharply at a later stage. An outcome in line with our provisional estimate would result in

the level of retail sales in Q2 being down 0.2% q/q versus Q1.

UK Services PMI: We expect the PMI figure to show a small deceleration in the pace of

output growth in the services sector. We forecast the index to have fallen to 53 in July from

53.9 previously. However, at this level the PMI would still remain consistent with decent

growth in the services sector.

North America

US Personal income and spending: We expect personal income to rise 0.1% and personal

spending to increase 0.1% in June. Within the income number, we are looking for a flat

reading in the main wages and salaries component, consistent with the sideways move in

average hourly earnings and decline in hours worked in the June employment report.

Elsewhere, we have penciled in small gains in rental and interest income. On the

consumption side, our forecast is consistent with a 0.1% gain in real terms as well (with a

flat reading on the PCE price index). Softness partly reflects the further decline in auto sales

during June, which we believe mainly owed to the supply disruption from Japan. Finally,

revisions to the recent history of the personal income and personal spending series, and

their components, will be published with the June release, to bring them into line with the

quarterly revisions to GDP published in the Q2 advance release.

US Vehicle sales: Vehicle sales declined to 11.4mn in June from 11.8mn in May and 13.1mn in

April. This, in large part, reflects a drop in supply as a result of disruption to auto production from Japanese suppliers, as well as decreased incentives and higher prices among domestic suppliers

in response to the supply effect. We expect a modest rebound to 11.8mn sales in July.

EEMEA

Russia: Banking sector no longer has excess liquidity, which has been clearly demonstrated

during the tax payment period. This should keep policy rates on hold.

Romania: The recent decline in inflation to 7.9% and expected fall in July to around 5-5.5%

relieves the pressure to raise rates. However, as inflation remains well above the 2-4%

target, there is no basis for cutting rates at this time. We think the next move will probably

be a cut, but not until H2 2012. Still no signs of life in consumer spending.

Turkey: We expect inflation to surge in July, partly due to unfavourable base effects.

Kazakhstan: KZT strengthening has likely triggered NBK to buy excess currency from the market.

Latin America

Brazil industrial production: This is consistent with a 0.3% m/m SA contraction of IP at the

margin, following drops in most of the IP leading indicators: -2.3% m/m SA in corrugated

paper production, -0.5% in heavy truck flow in toll roads, -0.1% in auto production and -

0.1% in energy consumption.




2 August 2011 10

CALENDAR

Tuesday 2 August Period Prev 2 Prev 1 Latest Forecast Consensus

00:30 Australia: Interest rate announcement, % Aug 4.75 4.75 4.75 4.75 4.75 A

- Uruguay: CPI, % m/m Jul 0.34 0.33 0.35 - -

03:00 UK: Halifax house price index, % m/m (3m/y) (5/8) Jul -1.4 (-3.7) 0.4 (-4.2) 1.2 (-3.5) - 0.0 (-2.8)

03:30 Swi: Retail sales, % y/y Jun -0.15 7.76 -3.9 R 2.1 7.4 A03:30 Swi: Manufacturing PMI, index Jul 58.4 59.2 53.4 51.1 53.5 A

04:00 E17: Publication of the MFI interest rate statistics - - - - - -

04:30 UK: Construction PMI, index Jul 53.3 54.0 53.6 53.0 53.5 A

05:00 E17 : PPI, % m/m (y/y) Jun 0.8 (6.8) 0.9 (6.7) -0.2 (6.2) 0.1 (6.0) 0.0 (5.9) A

06:00 South Africa: Naamsa Vehicle Sales (% y/y) Jul 8.0 6.1 12.6 - 10.5 A

06:00 South Africa: Kagiso PMI Jul 56.4 55.1 53.9 - 44.2 A

08:00 Brazil: Industrial production, % y/y Jun -1.3 -1.5 2.7 2.5 2.6

8:30 US: Personal income, % m/m Jun 0.4 0.3 0.3 0.1 0.2

8:30 US: Personal spending, % m/m Jun 0.6 0.3 0.0 0.1 0.2

8:30 US: PCE price index, % m/m (y/y) Jun 0.4 (1.9) 0.3 (2.2) 0.2 (2.5) 0.0 (2.6) -

08:30 US: Core PCE price index, % m/m (y/y) Jun 0.2 (0.9) 0.2 (1.1) 0.3 (1.2) 0.2 (1.4) 0.2 (1.4)

09:30 Singapore: Electronics PMI Jul 53.0 51.4 50.9 50.7 50.5

17:00 US: Vehicle sales, mn saar Jul 13.14 11.76 11.41 11.8 11.80

19:01 UK: BRC shop price index, % y/y Jul 2.5 2.3 2.9 - -

05:30 Belgium 17Nov 2011 &19Jan12 €3bn

05:30 UK: 2034 Gilt Auction £2bn

11:30 US: 4 week bills auction $18bn

Wednesday 3 August Period Prev 2 Prev 1 Latest Forecast Consensus

- Russia: Overnight Deposit Rate,% Aug 3.25 3.50 3.50 3.50 3.50

- Russia: Refinancing rate, % Aug 8.25 8.25 8.25 8.25 8.25

- Romania: Interest rate announcement, % Aug 6.25 6.25 6.25 6.25 6.25

- Uruguay – Unemployment rate Jun 6.4 6.4 6.4 - -

Kazakhstan: International Reserves (USD bn) Jul 37.0 36.0 34.8 35.0 -

South Africa: SACCI Business Confidence Jul 86.9 85.8 86.8 - -

03:13 Spain: Services PMI, index Jul 50.4 50.9 50.2 47.5 -

03:30 Swi: Manufacturing PMI, index Jul 58.4 59.2 53.4 51.1 52.8

03:43 Italy: Services PMI, index Jul 52.2 50.1 47.4 44.5 -

03:48 France: Final services PMI, index Jul 62.5 56.1 54.2 P 54.2 54.203:53 Germany: Final services PMI, index Jul 56.1 56.7 52.9 P 52.9 52.9

03:58 E17: Final services PMI, index Jul 56.0 53.7 51.4 P 51.4 51.4

03:58 E17: Final composite PMI, index Jul 55.8 53.3 50.8 P 50.8 -

04:00 Turkey: CPI, % y/y Jul 4.3 7.2 6.2 7.4 -

04:00 Romania: Retail Sales (% y/y) Jun -5.8 -6.2 -6.4 - -

04:28 UK: Services PMI, index Jul 54.3 53.8 53.9 53.0 53.3

05:00 E17: Retail sales, % m/m (y/y) Jun -0.9 (-1.5) 0.7 (0.8) -1.0 (-1.8) 2.0 (-0.6) 0.5 (-0.9)

06:00 Croatia: Real Retail Trade (% y/y) Jun P -2 3.7 1 - -

08:15 US: ADP private payrolls, chg, thous Jul 188 36 157 - 105

10:00 US: ISM non-manufacturing index Jul 52.8 54.6 53.3 54.0 54.0

10:00 US: Factory orders, % m/m Jun 3.8 -0.9 0.8 -1.2 -0.1

05:30 Portugal: BT 18Nov 2011 €0.5/0.75bn

22:00 Japan: Liquidity Enhancement Auction ¥300bn Note: All times are EDT time.Sources: Reuters, Market News, Bloomberg, Barclays Capital




2 August 2011 11

RESEARCH CONTACTS

Larry Kantor

Head of Research+1 212 412 [email protected]

Piero Ghezzi Head of Economics,Emerging Markets and FX Research+44 (0)20 313 [email protected]

US

Michael Gavin Head of International MacroStrategy+1 646 412 [email protected]

Barry Knapp

Head of US Equity Strategy+1 212 526 [email protected]

Dean Maki Head of US Economics Research+1 212 526 [email protected]

Guillermo Mondino Head of EM Strategy+1 212 412 [email protected]

Michael Pond Co-head, Interest Rate Strategy+1 212 412 [email protected]

Ajay Rajadhyaksha Head of US Fixed Income andSecuritised Products Strategy+1 212 412 [email protected]

Rajiv Setia Co-head, Interest Rate Strategy+1 212 412 [email protected]

Michael Zenker Head of US Commodities Research+1 415 765 [email protected]

Europe

Julian Callow

Head of International Economics+44 (0)20 7773 1369 [email protected]

Koon Chow

Senior EMEA Strategist+44 (0)20 777 [email protected]

Frank Engels

Co-Head of European Economics+49 69-7161 1832frank [email protected]

Laurent Fransolet

Head of European Fixed IncomeStrategy+44 (0)20 7773 [email protected]

Simon Hayes

Head of UK Economics+44 (0)20 7773 4637 [email protected]

Paul Horsnell Head of Commodities Research+44 (0)20 7773 [email protected]

Moyeen Islam UK Rates Strategy+44 (0)20 7773 [email protected]

Alan James Head of Inflation-linked Strategy+44 (0)20 7773 [email protected]

Christian Keller Head of Emerging EMEA Strategy+44 (0)20 7773 [email protected]

Paul Robinson

Head of FX Research+44 (0)20 777 [email protected]

Alia Moubayed Senior Economist – Middle East& North Africa+44 (0)20 313 [email protected]

Kevin Norrish Commodities Research+44 (0)20 7773 [email protected]

Antonio Garcia Pascual

Chief Southern EuropeanEconomist+44 (0)20 313 [email protected]

Edmund Shing Head of European Equity Strategy+44 (0)20 7773 [email protected]

Asia-Pacific

Jon Scoffin

Head of Credit Research andHead of Research, Asia-Pacific+65 6308 3217

[email protected]

Chotaro Morita

Head of Japan Fixed IncomeStrategy+81 3 4530 [email protected]

Kyohei Morita

Chief Economist, Japan+81 3 4530 [email protected]

Gavin Stacey

Australia and New Zealand FixedIncome Strategist+61 2 9334 [email protected]

Fumiyuki Takahashi

Equity Strategist, Japan+81 3-4530 [email protected]

Yoshio Takahashi Head of Non-Yen Strategy, Japan+81 3 4530 [email protected]

Nick Verdi Currency Strategist, Asia+65 6308 [email protected]

Tetsufumi Yamakawa Co-Head of Research, Japan+81 3 4530 [email protected]

Masafumi Yamamoto Chief FX Strategist, Japan+81 3 4530 [email protected]



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