The main message from the US Federal Reserve’s (Fed) decision not to start tapering its $US85 billion bond and mortgage buying program (QE) is one of concern that US economic growth is still not improving sustainably. To back up this point the Fed lowered its annual growth forecasts for 2013 to 2.0% to 2.3% range from 2.3% to 2.6% back in June, and for 2014 to 2.9% to 3.1% from 3.0% to 3.5% back in June. Despite improving signs in some indicators of US economic activity the big worries for the Fed are comparatively soft labour market conditions, the unhelpful big move upwards in bond and mortgage yields since it first hinted at possible tapering in mid-May and the impact of cuts in in government spending and higher taxes (fiscal drag) on economic growth. The Fed’s concern about fiscal drag can only have intensified late last week when Congress forwarded legislation to President Obama promising to fund government beyond October 1st, the start of new budget year, but by stripping funding for “Obama-care” the President’s major health insurance initiative – an ultimatum that virtually ensures that budget wrangling will again go to the brink, possibly beyond the brink, of closing government offices.

At the very least, the US budget stand-off, is likely to dampen US business and consumer confidence and at worst could see a deceleration in annualised US GDP growth below 2.0% in Q4 2013 which implies that the Fed will be no nearer to tapering QE at its 30th October policy meeting, or its 18th December policy meeting. The Fed has made it clear that it will only start to adjust policy when it views the US economy as being on a strong, sustainable growth path and at this point, barring an unexpected quick and major improvement in US employment with non-farm payrolls lifting 300,000 or more two months in a row (169,000 lift in August after a 104,000 increase in July), that does not look like occurring until well into 2014.

There are still likely to be positive signs about US economic growth prospects in indicators of housing activity and manufacturing activity too (last week the September Philadelphia Fed index lifted sharply to 22.3, its highest reading in more than 2 years, from 9.3 in August), but the Fed needs much more to be convinced that GDP growth is robust. As far as financial markets are concerned, near-term concerns about US budget wrangling are likely to give ground to a realisation that US economic growth and expansion in US company profits is likely to be underpinned by very easy monetary conditions for much longer than previously assumed. Despite volatility, the trajectory for US risk assets would still seem to be upwards.

Elsewhere, the main focus this week is on the run of purchasing managers’ indexes (PMIs) for September in China and Europe. China’s unofficial and official PMI readings look set to consolidate in expansionary territory above 51.0 providing further signs that economic growth in China bottomed earlier in 2013 and is reaccelerating. Industrial production in China has already accelerated above 10% y-o-y and importantly for Australian iron ore and coal producers, the improvement in Chinese industrial production has been particularly pronounced in electricity generation and steel production.

In Europe, the combined September PMI for the euro-area is out tonight and is expected to edge up on consensus forecast to 51.8 from 51.7 in August a sign that business activity is consolidating in expansionary territory. The euro-area also received good news at the weekend with a strong German election victory for Chancellor Merkel implying a continuation of Germany’s tough love for the euro region – financial support in return for fiscal consolidation. Most likely German business confidence indicators will extend their very positive run up over the past few months.

In Australia, new economic information is in very limited supply until the beginning of October and the release of August retail sales just ahead of decision of the RBA’s October policy meeting. Retail sales may still be relatively flat, but there is plenty of evidence that home buying activity is rising strongly as are house prices too in several Australian cities. Also the RBA’s major concern, the length and depth of the downturn in mining investment and its negative impact on growth, may not be quite as big a concern as it has been. There are signs that one or two sizeable mining investment projects that were suspended earlier in the year may be revived. Rather like the Fed, the RBA will take a lot of convincing that Australian GDP growth is improving. The 2.50% cash rate looks to be set in place for many months to come. Australian risk assets, like their international counterparts, would seem to be on an upward trajectory supported by very easy monetary conditions and slowly improving economic growth.