The US government shutdown means that we will not see the September employment report today. The release will be postponed, or if the shutdown persists long enough, perhaps even omitted altogether. There are only minor data releases today, with Europe’s and Germany’s recent producer price indices being the most notable. Unfortunately, both are bound to be non-events, and will just confirm that inflation remains at a very low level. As US politics has robbed us of the traditional Friday of fun with jobs data, I return the favour by discussing recent coverage of the shutdown.
Fed speakers: There will be several Federal Reserve presidents speaking today. Dudley and Stein will be speaking in a New York Fed workshop on “fire sales” as a driver of systemic risk — they might talk about the experimental overnight fixed-rate reverse repurchase agreement facility. The topic is timely and important, but unfortunately under the Chatham House Rule, these will be off-the-record events except for the two speeches. On Thursday, some presidents were reported as being worried about the shutdown’s effects, and even more anxious about the approaching debt ceiling. Lockhart and Williams both specifically mentioned that tapering will probably be postponed. I expect today’s other speakers to continue that line of thought. (All times are GMT).
- 12:30 Fisher
- 13:15 Dudley
- 13:30 Stein
- 16:30 Lacker
- 17:45 Kocherlakota
Marketwatch noted that the credit default swap (CDS) prices on US treasury notes have been rising higher and were trading at 45 basis points yesterday, up from 35 basis points a day earlier. The CDS price means that it would cost USD 42,000 annually to insure USD 10 million of US debt against default, equal to 0.42 percent of the face value. While the recent rise sounds like a big move, a longer chart shows that the CDS has spent most of the post-Lehman time between 30 and 50 basis points, but did spike above 60 during the debt ceiling trouble of 2011. In addition to the usual thermometers of VIX and bond yields, the CDS price is a good one to keep an eye on. One place to check the recent quote is CNBC. DB Research provides a nice primer on implied default probabilities and charts, including free downloadable historical CDS price data. The price of default protection on US is currently at the same level as on Austria or UK, and somewhat higher than on Germany.
US Government Shutdown and the debt ceiling: This is the fourth day of the US government shutdown. While the market reaction has thus far been muted, the longer the shutdown persists, the more the markets will price in the negative effects arising from the decrease in public spending.
The Washington Post thinks that the 2013 shutdown is much more dangerous than in 2011, as back then there was something to negotiate about and the deficit reduction was the goal of both parties. Now neither party wants to be seen caving in to the other’s demands. It might take weeks before “ordinary” people start seeing the negative effects of the shutdown and before that point there will be little pressure from the electorate to find a solution.
Guggenheim Partners looked at the previous shutdowns and noted that stocks and the USD tend to underperform during the shutdown, but overperform after it. WSJ looks at Jason Goepfert’s study and surmises that “stocks tend to struggle during government shutdowns and shortly thereafter. But one month later and beyond, the market tends to regain its footing.”
The FT’s Long Short-blog argues that previous shutdowns have been short in duration and have had only little effect on stock prices. The negative effect on the GDP is noticeable, but temporary. In fact, the shutdown is seen ruining the reputation of the Republicans, which should help in finding a solution to the debt ceiling, which could potentially be a much more serious problem.
The US Treasury Department released a note yesterday on the potential macroeconomic effect of debt ceiling brinkmanship, and WaPo summarized the note. Even the threat of a breach of the debt ceiling was enough to make consumer confidence and stock prices plummet, while lending costs rose notably and the US lost its long-standing AAA-credit rating.
The Washington Post interviewed Mark Patterson, who was chief of staff at the Treasury from 2009 to 2013 and saw the 2011 negotiations from the front row. Mr. Patterson sees breaching the debt ceiling as a step into the great unknown, and does not think tricks like minting a trillion dollar coin are plausible.
On October 17 the treasury will have exhausted fundraising measures, and would have to resort to operating on cashflow alone. At that point the treasury is estimated to have USD 30 billion in cash which would run out in a week or two. This would make getting past the November 1 without a default almost impossible. Zero Hedge lists BofAML’s thoughts on how the credit rating agencies would react to a worsening debt ceiling fiasco. Let’s hope that reason prevails.