Wall Street Responds To The Government Shutdown
No, we are not talking the stock market reaction, which is driven purely by trillions in excess global, fungible liquidity sloshing around and as a result stocks are up on government shutdown day in a complete mockery of, well, everything. Instead, this is what Wall Street sellside strategists believe will be the impact of the shutdown (and how it ties in with the far more important debt ceiling negotiation). It should not be at all surprising that to virtually everyone, the shutdown (or any other negative development) is a "buying opportunity" which makes sense: after all the person who is truly in charge of the "wealth effect" will be up and running uninterrupted and there is no risk today's $2.75 - $3.50 billion POMO will be even modestly delayed.
GOLDMAN: Modest Effects
A shutdown would have modest macroeconomic effects. We estimate a two-day shutdown would reduce growth in Q4 at an annualized rate by 0.1pp, while a week-long shutdown would be worth -0.3pp. The reasons the effects would not be greater, despite the size of the federal government, are that a) only activities funded by congressional appropriations (so-called "discretionary spending") are affected; this represents about one-third of total federal spending, b) a little over half of activities within that category of spending are likely to be deemed critical and thus exempt; and c) in the areas that are not exempt, employee salaries would be cancelled during the shutdown, but most other procurement of goods and services would be made up shortly after the shutdown ends. The upshot is that as many as 800k federal employees would probably not work and would not be paid during the shutdown. For comparison, in July 2013 nearly 700k Department of Defense civilian employees were furloughed without pay for 3.5 days as a result of sequestration.
IHS: $300 Million per day in lost output
A partial shutdown of the federal government would cost the U.S. at least $300 million a day in lost economic output at the start, according to IHS Inc. Lexington, Massachusetts-based IHS, a global market research firm, estimates that its forecast for 2.2 percent annualized growth in the fourth quarter will be reduced 0.2 percentage point in a weeklong shutdown. A 21-day closing like the one in 1995-96 could cut growth by 0.9 to 1.4 percentage point, according to Guy LeBas, chief fixed income strategist at Janney Montgomery Scott LLC in Philadelphia. “Government spending touches every aspect of the economy, and disruption of spending, more than the direct loss of income, threatens to damage investor and business confidence in ways that can seriously harm economic growth,” LeBas said yesterday in an interview.
RABOBANK: US Government Shutdown Could Boost Markets
“The failure to avert the shutdown does not bode well for an agreement being reached to raise the debt ceiling. In addition the shutdown also means that the release of the nonfarm payrolls number on Friday will be delayed. All this suggests that the Fed is likely to have more caution in its QE tapering than was even recently expected and so, in the perverse world of central bank liquidity driven markets, we could well see a bid for both USTs and equities.”
FIDELITY WORLDWIDE INVESTMENT: Stock market weakness presents a buying opportunity
Trevor Greetham, director of asset allocation: “The dispute has the power to depress economic activity temporarily and it will play havoc with the economic release calendar. But the U.S. is four years into a steady, self-sustaining recovery and the Federal Reserve stands ready to offset any marginal fiscal tightening that may come out of the negotiations. We do not expect the fiscal standoff in Washington to have a lasting impact… When the smoke clears we will see a global expansion that is strengthening and broadening with monetary policy set to stay loose in every major economy. An equity-friendly backdrop.”
SOCIETE GENERALE: Context matters
Kit Juckes, macro strategist: “There have been 17 Federal shutdowns since 1970. The S&P has fallen on 9 of these occasions and has fallen in the week after the shutdown on 11 occasions. The early shutdowns in the Ford and Carter Presidencies came against a backdrop of rising bond yields, falling stocks and weakening dollar. Maybe we can fear a return to the dark period of the late 1970s but on Jimmy Carter’s 89th birthday I am inclined to believe he just got dealt an awful economic hand. Likewise the very short stops in the Reagan years tell us little. Yields were going up until Q3 1984 and have basically been falling ever since. The two shutdowns in 1995 were ‘good’ for the dollar, the equity market and for 10-year Notes. But, the economy was in better shape than it is now and this came after the 1994 spike in yields.
“The context of the shutdown matters more than the event itself. A modest economic recovery is fragile enough that we have seen some softer data in interest rate sensitive sectors since ‘taper’ entered the market lexicon in May. A shutdown won’t help economic sentiment. So the front end of the U.S. curve will probably see rate hike expectations pushed even further out.”
MORGAN STANLEY: Market reaction is that this is not such a big a deal
Ted Wieseman: At least the initial market reaction appeared to be that a short government shutdown itself is probably not that big a deal and that if the fight over a continuing resolution to fund the government at the start of fiscal year 2014 on Tuesday becomes the central fiscal policy fight, then chances of a debacle with the debt ceiling, which will have to be raised by the end of October, may be lessened.” Mr Wieseman said it’ll become clear in the coming weeks whether the market was right to assume these latest fiscal fights would end up getting resolved before there is “much serious, lasting damage, like the others”.
UNICREDIT: This stopped out our trade against the euro
Armin Mekelburg, FX strategist: “We were stopped out at 08:39 (CET) today in our short euro trade against the dollar in the wake of a broad dollar selloff. We opened this short-term tactical trade at 1.3481 on 24 September as most currency pairs had rather swiftly given back their post-FOMC gains, while EUR/USD had lagged in this correction phase and we felt that this gap was likely to close… We had to close our short EUR-USD trade recommendation for a spot loss of -0.66%.”
NOMURA: A way forward can be found
Analysts: “The shutdown could take a week or more to resolve, and the next real deadline is the debt limit, which is expected to become binding around 17 October. We expect popular opposition to the shutdown to build over time, which should generate added public pressure to find a way to overcome both the impasse on spending and raise the debt limit. We believe a way forward can be found before the debt limit becomes binding.”
BNP PARIBAS: We didn’t think it would come to this
FX analyst, Steven Saywell: “The outcome was not our base case scenario and should result in downward pressure for the dollar against core, low-yielding currencies, but gain against the commodity bloc and emerging market currencies via the risk-off channel.”
BARCLAYS: It’s the debt ceiling that matters
Nick Verdi, Joseph Abate: “We expect foreign exchange markets to trade mildly ‘risk-off’ in the coming days. The dollar should rally primarily versus US growth-linked currencies, such as the Canadian dollar and Mexican peso, and is likely to remain under pressure against other ‘safe-haven’ currencies, including the yen and the Swiss franc. The bigger market risk event remains a breach of the debt ceiling. We expect such an event to be more broadly risk negative. A higher risk of a US sovereign default should lead to a flight to liquidity and, ironically, a stronger dollar, except against the most liquid/safest-haven ones: euro, yen, the sterling and the Swiss franc.”
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