The Market Today

Government Shutdown Unlikely to Yield Macroeconomic Impact


by Craig Dismuke, Dudley Carter

Government Shutdown:  The federal government is officially shutdown this morning after a Friday midnight deadline passed for Congress to fund the various expenditures they’ve already approved.  While it may sound like an absurdity to require Congress to pass a spending authorization for already-approved expenditures, the process actually works as a needed check-and-balance, along with the debt ceiling, for a group of profligate spenders.  Nonetheless, the political rhetoric and procedural morass will continue to be easy targets for headline writers.  It is difficult to predict the duration of the shutdown.  Another Senate vote is scheduled today but those votes have yet to bear any fruit.  There are a few key points to remember for investors; but, the bottom line is that government shutdowns have very little impact on macroeconomic activity or the markets.

 

Recent History of Funding Gaps/Shutdowns

  • This is the 16th funding gap since 1981, most often ranging from one to three days in length
  • The most recent occurred in 2013, resulting in close to 800,000 federal employees being furloughed between October 1 and October 16

Only Part of the Government Shuts Down

  • “Essential services” and “mandatory spending” items continue uninterrupted, including:
    • Law Enforcement
    • Defense
    • Interest payments
    • Social Security
    • Medicare

Impact to Economic Growth

  • Furloughed employees receive salary pay retro-actively once the shutdown is concluded
    • As such, affected employees’ consumption tends to be unchanged
    • Depending on the length, some employees may be asked to perform work without a scheduled pay date
  • Because some government funded projects will be delayed, it is likely to cut into 1st quarter growth by 0.1% per week
    • Any cut in activity should only be delayed
    • Because this shutdown is occurring early in the quarter, the rebound may occur all intra-quarter
    • If it does not, the rebound is likely to be seen in 2nd quarter growth

Impact to Markets

  • Historically, the markets have taken government shutdowns in stride because there is so little impact to actual activity (see charts below)

Impact to Economic Reports

  • Economic releases provided by the government will be delayed so long as the shutdown persists
    • This week’s government data includes new home sales, the advanced goods trade balance, and the first estimate of 4Q GDP growth
    • These reports could be delayed, but would eventually be released
  • Initial Jobless Claims have often increased during times when the government shuts down, albeit temporarily
  • Consumer and business confidence reports could take a hit if the shutdown is protracted

January 30-31 FOMC Meeting

  • Even if the shutdown persists through the end of January affecting the FOMC meeting, it should be immaterial given that no change to monetary policy is expected

Thing to Watch – March

  • If the shutdown results in another short-term continuing resolution, the risk of a funding bill coinciding with a March debt ceiling hike will grow
  • Negotiating both government funding and the debt ceiling in March has the potential to create more market volatility

 

Today’s Economic Calendar – Shutdown Watch:  The only economic report on the calendar today is the Chicago Fed’s National Activity index.  The index, an aggregation of 85 different economic variables, rose from 0.11 to 0.27 in December.  A reading above 0.00 indicates above-trend growth.  The 3-month average is now 0.27.  A 3-month average above 0.70 is consistent with inflation-inducing growth.  The markets do not pay attention to the index.  Investors, however, will be focused on developments with the government shutdown.

 

Overnight Activity – Politics and Monetary Policy Will Be a Focus This Week: Markets have so far been relatively quiet to start a week that could be busy with developments on the political and monetary policy fronts. Asian equities were firmer but stocks in Europe are essentially flat from Friday’s close. Sovereign yields are also mixed with core European yields drifting higher and those on the periphery moving lower. The U.S. yield curve inched flatter overnight as longer yields ticked down while the short-end held steady. The Dollar dipped back towards a three-year low it made last Tuesday but has partially recovered within the last several hours. Political developments were more positive in Europe over the weekend than in the U.S. While the U.S. government shutdown rolled into its third day, Germany’s government took a positive step on Sunday. The SPD voted in favor of coalition talks with Angela Merkel and the CDU. Monetary policymakers will also be in focus, with the Bank of Japan (BoJ) and European Central Bank (ECB) set to announce their latest decisions on Tuesday and Thursday, respectively. The BoJ sent yields higher two weeks ago after trimming its monthly asset purchases. Investors will be watching closely for any signs the central bank is beginning to plan for less accommodation. Speculation is also growing that the ECB could wrap up its QE program as early as by the end of this year. As such, investors will be tuned in to any changes in the Statement and to President Draghi’s press conference. U.S. assets are little changed despite the deadlock in Washington; equity futures are mixed, the 2-year yield is unchanged at 2.07%, and the 10-year yield is down 1.1 bps to 2.65%.

 

ICYMI – January 19, 2018 Weekly Market Recap: Trading trends that have so far defined 2018 activity remained in place in last week’s trading. U.S. stocks rose for a third week as global equities gained. Treasury yields increased again despite slightly lower yields across Europe. And the Dollar dropped for a fifth consecutive week after it touched its lowest level in more than three years on Tuesday. Momentum seemed to carry rates higher as the economic data proved mixed and there were no earth-shattering developments in comments from Fed officials. Even speculation that Congress would fail to reach a spending compromise couldn’t derail the move higher for stocks and rates. The 2-year yield rose 6.3 bps to 2.06%, a new high for the cycle. The 5-year yield rose 10.3 bps to 2.45%, its highest level since May 2010. The 10-year yield rose the most, adding 11.1 bps to 2.66%, the highest mark since May 2014. The run in yields that began last September has shown no real signs of slowing in 2018. For the year, the 2-year yield has added 17.8 bps, the 5-year yield is 24.3 bps higher, and the 10-year yield has added 25.2 bps. Click here to see the full recap.

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