The most anticipated data point of the week, the U.S. September Employment report, was not released due to the U.S. government shutdown. The Purchasing Managers' Indices across the globe supported the scenario of a "synchronized global expansion," but there was no evidence of an acceleration of economic activity. Most equity markets were lower on the week. Bond markets were mixed, but credit spreads were a bit wider. The U.S. dollar gained against the Pound, but fell against the Yen, Euro and Looney. Oil prices were higher, but metals commodity prices were lower on the week.

Perspective:

Washington's inability to pass a budget, let alone a continuing resolution, is more than disappointing. This week's failure and the potential for the disfunctional behavior to continue into the debt ceiling debate, will have long-term impact on the economy. The fact that most U.S. equity markets were down only slightly this week suggests that anticipation of this crisis was already reflected in the previous week's decline.

There are other measures of the immediate impact of the shut-down. One measure is the price of the credit default swap on U.S. treasuries; this contract is a measure of credit risk. Very few actually expect the U.S. government to fail to pay its obligations, but this contract hedges that "tail" risk. The price of the contract for protection for five years rose to +0.41%; the price for a one-year contract was +0.54%. The fact that the five-year contract was lower than the price of the one--year contract suggests that the risks were more near-term. The last time that this inversion of prices occurred was in 2011, when the U.S. faced a similar stalemate. These CDS contract prices are higher than they were were just two weeks ago, when the five-year price was almost half at +0.22% and the one-year contract was a tenth of this week's contract at +0.05%.

The long-term measures of the impact are more difficult to see. Lack of confidence (that our elected officials can work together) impacts the decisions that both businesses and consumers will make about their respective economic activities. In the season finale of AMC tv’s Breaking Bad, Walter White, before he died, managed to kill those who threatened his family and admitted to his wife his own selfish motive for his methamphetamine business. Nonetheless, it is hard to imagine that his family will ever be out from under the cloud of his misdeeds. Similarly, even though the U.S. government will eventually be funded, it is hard to imagine that we will ever be out from under the cloud of misdeeds of our elected representatives. The negative consequences of their inaction will endure.

Economic Releases:

The U.S. ISM Purchasing Managers Index for Services (red in the chart) fell to 54.4 but the PMI for Manufacturing (blue in the chart) rose to 56.2 in September. Both PMI sectors remained solidly in the expansion zone, above 50; the Manufacturing component recorded its highest level in more than two years.

Other Economic Releases

The Labor Department announced that the U.S. Employment Report would not be released on schedule due to budget issues. On the weekly report, Initial Jobless Claims rose slightly to 308,000 while the four-week average of Claims fell to 305,000 the week of Sept. 28; this was the fifth straight decline in the four-week average. Continuing Claims rose, due to a catch up in a reporting technology glitch, to 2.925 million; the four-week average of Continuing Claims dropped to 2.837 million, a new recovery low. In other employment news, ADP Employment reported 166,000 new private employment jobs in September; the ADP report was at the low end of the range of expectations. Construction Spending and Factory Orders were both delayed due to the budget impasse.

The ECB met and, as expected, left its refinane rate unchanged at 0.50%. The sluggishness of the recovery since the last meeting prompted European Central Bank Chairman Mario Draghi to forecast that interest rates would remain low for an extended period of time. The Markit PMI for the Composite and Services both rose to 52.2 in September. The EU Unemployment Rate remained at 12.0%. The Eurozone PMI for Manufacturing slipped slightly to 51.1, but as with the Markit PMI's remained in the expansion zone. Germany's Markit PMI Composite Index slipped to 53.2, but its Services Index rise to 53.7; Germany's Manufacturing PMI slipped to 51.1 in September. France's Markit PMI's for its Composite and services both crossed into the expansion zone to 50.5 and 51.0 respectively; France's Manufacturing ticked up to 49.8, just below the demarcation between expansion and contraction. The UK's PMI for Manufacturing fell a point to 56.7; UK's PMI for Services slipped two ticks to 60.3.

China's CFLP Manufacturing PMI rose a tick to 51.1. Japan's Markit PMI for both the Composite and Services rose to 53.2 and 53.0 respectively. The Bank of Japan met this week and left interest rates unchanged.

Equities Markets:

The equity markets were mixed and little changes, which indicated that much of the debacle in Washington was already reflected in equity prices going into this week. The decline in Japanese stocks may have been related to Prime Minister Abe's proposed increase in the Sales tax.

Bond Markets:

Bond yields and credit spreads were a touch higher in most markets across the globe.

Currencies & Commodities:

The U.S. Dollar rose against the Pound, but fell against the Yen, Euro and Looney on the week. Oil prices were a percent higher, but metals commodity prices were lower.

Who is John Davidson?

John W. Davidson, CFA, started writing these Comments more than a decade ago as a personal discipline when he was promoted to from portfolio manager to chief investment officer and CEO.

Most recently, he was the president of PartnerRe Asset Management Corporation, responsible for the management of PartnerRe's invested assets, which grew from $4 billion to $12 billion during his tenure. After joining PartnerRe in the fall of 2001, he hired the staff, built the trading floor and created the infrastructure to manage both fixed income and equity assets internally. He retired from PartnerRe at the end of 2008 and moved to Maine, where he focused on board work.

He has more than 35 years of industry experience, including positions with investment management responsibility for separate institutional accounts, mutual funds, trusts and insurance assets. Prior to joining PartnerRe, he served as president and chief executive officer of two other investment management companies. For various companies he has held positions as chief investment officer, chief economist, head of fixed income and portfolio manager. As a portfolio manager, Davidson managed and traded U.S. Government Securities as well as futures and options on fixed income instruments.

His real world experience is backed by a strong academic foundation, which includes earning a Master of Business Administration in finance and a Master of Arts in mathematics from Boston College, as well as a Bachelor of Arts, cum laude, in economics from Amherst College. He holds the professional designation of chartered financial analyst.

His experiences and credentials have brought him to the public as a television commentator and conference speaker. In addition to his frequent past appearances on CNBC, CNNfn, Bloomberg TV and Yahoo FinanceVision, he appeared as a special guest on Wall $treet Week with Louis Rukeyser. Reuters, Bloomberg and other business press services have quoted his views on the market. He has taught CFA preparation programs, as well as other courses offered by the Stamford and Boston CFA Societies, and the National Graduate Trust Officers' School.

Davidson is a natural leader in both his professional and personal life, having developed those skills early in his career as a naval officer. He spent three years on active duty, which included a year on the rivers of Vietnam, and 24 years in the Naval Reserve, from which he retired as a captain in 1994.

Davidson is treasurer and board member of the Camden Conference. He is also on the investment committee of the Pen Bay Health Foundation. He serves as an independent trustee for mutual funds.

In his leisure time, he is an active sailor, tennis player and skier. With his wife, Barbara, he renovated a 100+-year-old home in Camden, where they enjoy spending time with their two golden retrievers and having visits from their five children. He can be reached at jwdbond@me.com.