Investors may have been relieved there was a Washington debt deal but they weren't impressed enough to celebrate on Monday -- and that may not bode well for stock prices for the rest of the year.
Rather than a relief rally, U.S. stocks ended modestly lower on Monday as ugly economic data and some lingering concerns about whether the deal would get through Congress dominated trading. But even when the House of Representatives voted to pass the plan late in the day there was little reaction from U.S. stock index futures.
The deal agreed to by Republican and Democratic leaders will raise the government's borrowing ceiling while cutting spending by at least $2.1 trillion over 10 years. All of the burden could fall on spending cuts with no guarantee of steps to lift tax revenues.
Rather than perceiving it as a meaningful effort at tackling the United States' huge debt problem, investors worried about the impact of austerity on an economy already hit by souring business and consumer confidence.
Plans for such a significant fiscal retrenchment, even though most of the impact will be in the latter years of the program, come at a vulnerable time for the world economy. Recession risks are rising in the United States, the European economy remains entwined in its own debt crisis, and China's supercharged economy could slow.
"Risk markets may rally temporarily, but until economic growth and job creation is addressed, there can be no sustained rally," Bill Gross, the co-chief investment officer of PIMCO, which manages more than $1.2 trillion, said in an interview.
Eight months ago, economists and investors were expecting a strong rebound in global growth, given the massive liquidity flooding world financial systems, partly thanks to a bond buying program by the U.S. Federal Reserve. But economic headwinds have made a recovery elusive -- with the U.S. economy growing at an anemic rate in the first half of the year.
Data on second-quarter gross domestic product published on Friday showed the world's largest economy expanded at just a 1.3 percent annual rate in the April to June period. More worrying, revisions to the first quarter left annualized GDP growth at just a 0.4 percent pace -- perilously close to a contraction.
And on Monday, figures from the U.S. Institute of Supply Management showed that the U.S. manufacturing sector grew at the slowest pace in two years in July. [nN1E7700HA]
The figures prompted some analysts to wonder whether market forecasts for an unspectacular gain of 90,000 jobs in July may be overly optimistic, following truly dismal readings for May and June. The jobs report is due on Friday.
Corporate America's recent announcements haven't helped the outlook.
Europe's biggest bank, HSBC , announced Monday it will cut as many as 30,000 jobs worldwide by 2013. And on Friday, Merck & Co. Inc. , the second largest U.S. pharmaceutical company, announced it was cutting 13,000 jobs.
There are many signs of a profit slowdown, said Thomas Doerflinger, strategist at UBS. In contrast to the first quarter
earnings season, company commentary from such firms as 3M Co , United Parcel Service Inc , Illinois Tool Works and Emerson Electric Co. suggests business activity slowed in June and July, he said. "Budgetary wrangling in Washington could exacerbate this trend," he added.
On Monday, the Dow Jones industrial average <.DJI> declined more than 145 points during the day before recouping most of those losses to end the day down only 10.75 points.
The more notable movement, however, is in the benchmark 10-year U.S. Treasury note. Reflecting the lack of risk appetite in global markets, the T-note was yielding 2.75 percent and is now down more than 80 basis points since early spring when it was yielding 3.58 percent.
It isn't as if China and Europe are providing much comfort.
China's manufacturing sector slowed further in July as Beijing cooled an overheated economy and demand for exports weakened amid Europe's debt crisis and sluggish U.S. growth, two surveys showed Monday.
China has been the engine of growth throughout the year and a slowdown could have repercussions for other countries that are looking to rapid Chinese expansion to drive demand for everything from iron ore to factory machinery and consumer goods.
In Europe, concern is growing that Spain, the euro zone's fourth-largest economy, will fail to put its finances in order and need a Greek-style bailout.
"I see more risk from the European Union than the U.S. right now," said Aray Gustavo Feldens, a financial consultant in Porto Alegre, Brazil.
It all provides U.S. Federal Reserve Chairman Ben Bernanke with plenty of reasons for anxiety.
"In a remarkable parallel to last year, Fed officials head into their August meeting amidst weak growth and questions about the possibility of further monetary easing," economists at Goldman Sachs wrote last week.
Gross said Bernanke will likely hint at a third round of bond purchases, which inject money into the economy and are known by the term quantitative easing, at its annual retreat at Jackson Hole in Wyoming later this month.
If that happens it could give stocks a fillip, as it did last year, though Bernanke may run into major opposition from within the Fed if he wants to embark on a QE3 program close to the $600 billion in QE2. A sustained rally, though, may be too much of a stretch, investors say.
(Reporting by Jennifer Ablan; Editing by Martin Howell)