httpvh://www.youtube.com/watch?v=1tpFxHY5p5k

Everybody loves a bit of theatre especially, it seems, the US House of Representatives. Last night’s vote on the raising of the debt ceiling and an accompanying deficit reduction plan passed the house 269 to 161: so with a few votes to spare after all. The Senate is scheduled to vote on the measures today at 5pm BST, which should be a foregone conclusion, and once President Obama has signed the bill the debt ceiling would be raised immediately by $400bn.

I don’t think anyone believes that this is a perfect solution to the US debt problem, probably because it’s not. Even if the bill is passed today there is no guarantee that this will prevent the ratings agencies from downgrading the US’s AAA rating. The likely effects of that downgrade are still unknown however and nobody in the City, on Wall Street, or on Capitol Hill is sure what will be sold and in what size.

The relief that a deal was on track was overshadowed yesterday by a global slowdown in manufacturing that spread from China, through Europe and to the United States. Chinese PMI, long a vanguard for global economic expansion, fell to 50.7; only slight growth. Anything above 50.0 is viewed as expansion while below symbolises contraction. Italy’s was 50.1, France’s 50.5 with even Germany missing expectations with a reading of 52.0.

Unfortunately the UK’s was even worse (49.1) and shows that the UK cannot rely on the manufacturing sector to dig it out of the slowdown just yet. It seems that this year’s early glut of orders was as a result of businesses rebuilding inventories. The slowdown in consumer spending has meant that these orders have dried up and hence the contraction. Manufacturers will also still be feeling some supply chain issues from the Japanese earthquake and tsunami but this is a secondary reason. The PMI is a great indicator of the contribution that a certain sector will make to the quarterly GDP number and with this we can expect that manufacturing will be a hindrance more than anything.

The US’s, while still showing expansion, was well below expectations and was the final nail in the coffin for yesterday’s rally in risky assets. All equity indices reversed lower on the day with the dollar, Swiss franc and the Japanese yen picking up steam while the euro dipped. Whether this caused or was caused by rumours of funding problems in the Italian banking sector remains to be seen, but as we said yesterday, once the circus in Washington has moved on the market will swing its myopic gaze back to the European debt situation. The EU/IMF/ECB troika start their quarterly audit of the Portuguese economy today and headlines will be volatile.

Obviously most of the market’s eyes will be on the US later today but we do have 2^nd tier data this morning from the UK (PMI from the construction industry at 09.30) and EU PPI at 10am. We also have June’s personal income and spending figures from the US at 13.30 which are likely to be poor given the personal consumption drag that we saw in Friday’s GDP numbers.

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