The Market Today
Government Shutdown Looms as Markets Still Wrestling with Fed’s Autopilot
by Craig Dismuke, Dudley Carter
3Q GDP Revised Down to 3.4%: The final revision to 3Q GDP was notched lower to 3.4% on slightly weaker personal consumption, fractionally weaker residential investment, a small increase in inventory accumulation, and a 1/10th larger adjustment from inflation. All told, the revision has very little impact on perception of stellar growth in the middle of 2018 and does not alter the 4Q growth outlook.
Business Investment Data Disappoints Again: The preliminary report on November’s durable goods orders rose 0.8%, just half the expected increase. Excluding the volatile transportation items, orders fell 0.3% but October’s tally was revised up from +0.2% to +0.4%. The core capital goods orders and shipments data saw similar results. Core orders (excluding defense and aircraft) were revised up in October from +0.0% to +0.5% but November’s orders fell 0.6%. Shipments of those same items were revised up from +0.3% to +0.8% but November’s data showed a 0.1% decline. Taking the revisions and softer November data into account, the November results disappointed expectations and, importantly, show a continued decline in the pace of activity. The orders data now point to no growth in business fixed investment in equipment in 4Q.
Personal Income, Spending, PCE Inflation, Consumer Confidence: In an unusual blitz of data, November’s personal income, spending, and PCE inflation data will all be released at 9:00 a.m. CT. Income and spending are expected to show another strong month while the Fed’s preferred inflation measure is expected to tick up from October’s surprising drop to 1.8% YoY (core PCE). The UM Consumer Confidence report will be released at 9:00 a.m. also.
Government Shutdown Looms Large…: If a shutdown does occur, starting at midnight tonight, hundreds of thousands of government workers in departments deemed as “non-essential” (approximately 1/3 of Federal workers) would be placed on unpaid leave (although wages have historically been paid post-facto). Social Security and Medicare benefits would still be paid benefits which would be delivered via the U.S. postal service. Military personnel would stay on the job but their paychecks could be delayed if the shutdown were to last long enough. TSA workers would remain on the job (flights will continue) along with police, firefighters, and teachers. The Fed, most bank regulators, and the CFPB are all funded by mechanisms apart from the appropriations process, meaning they will keep their doors open.
But not So Much for Investors…: The modern budgeting process was put into place back in 1976. There were several shutdowns leading up to 1979 when a judge ruled that the 1884 Anti-Deficiency Act required the government to shut down at least part of its operations if Congress did not grant itself spending authority. Since that ruling, there have been 13 shutdowns. While most have been 1 to 3 days long, a 1995 shutdown lasted 21 days and the most recent, in 2013, lasted 16 days. Despite some sensational reporting of late to the contrary, the economy does not fall apart because the government halts non-essential services for a temporary period. The markets may experience some short-term volatility, but the impact has historically been minimal and temporary. During the last twelve shutdowns the average change in the 10-year Treasury yield from 10 days before a shutdown to 10 days after has been a drop of 12 basis points. The DJIA has averaged gains of approximately 2.3% during the same time periods.
Yesterday’s Trading – Stock Sink as Investors Digest Fed Decision, a Potential Government Shutdown, and Trade Fears: Markets seemed to be fairly placid coming into the trading day yesterday with equity futures moderately lower and Treasury yields holding near Wednesday’s close. That placidity faded quickly once U.S. markets opened with equity weakness dominating the headlines. Investors continued to wrestle with Wednesday’s Fed decision and the perception that the “Fed put” was a thing of the past. Adding to concerns, President Trump told House Speaker Ryan not to proceed with the short-term government funding deal passed by the Senate, indicating he would not sign the bill because it included no funding for border security. Additionally, the Department of Justice announced indictments against two Chinese nationals accused of cyber espionage against U.S. interests. The two were reportedly connected directly to the Chinese government, adding to the list of obstacles for a U.S. China trade deal. The confluence of concerns sent stocks sharply lower. By 11:15 a.m. CT, the Nasdaq was down 189 points and officially down 20% from its August intraday peak, putting the index in “bear market” territory. After rallying back 81 points, the index closed down 19.49% from its August 29 close. The Dow fell 464 points (2.0%) while the S&P 500 fell 1.58%. The S&P is now down 10.6% in December, 15.3% in 3Q alone, and is off to its worst December performance since the Great Depression (see Chart of the Day). Meanwhile, the 10-year Treasury yield rose 5 bps to 2.81% as the 2-year yield rose 2 bps to 2.67%, pushing the 2/10 spread back up to 14 bps.
Overnight Trading – Yields Drop Back as Fears of Shutdown Grow: The odds of a government shutdown were increased yesterday when President Trump refused to sign a short-term funding deal passed by the Senate. In response, yesterday evening the House passed a new funding resolution which including a reported $5.7 billion for border security. The Senate will now take up the House-passed measure with a high uncertainty of passage. The president has shown no fear of the political ramifications of a shutdown, tweeting out this morning, “Shutdown today if Democrats do not vote for Border Security!”. He subsequently tweeted, “there will be a shutdown that will last for a very long time. People don’t want open borders and crime!”. Treasury yields have grinded lower overnight in response with the 10-year yield down 4 bps to 2.785% and the 2-year down 1 bps to 2.656%. U.S. stock futures are also lower, pointing to the Dow opening down almost 100 points. Overseas, the risk-off mood weighed on global markets with Chinese stocks down 1.6%, Japanese down 0.1%, and Eurozone stocks down 0.4%.