What To Look Out For Today - The Three Congressional Scenarios

From Citi's Steven Englander

What To Look Out For Today: Posturing OK, But Watch Out For Amendments

The key for markets when they reopen is whether the House passes the fiscal cliff fix. Bother Boehner and Pelosi have indicated they support bringing the bill to a vote but they have not endorsed it. There are reports that the House vote would be as early as 2PM but that seems unlikely given the need for debate and posturing. Other reports suggest a vote around 5PM. The key is not when the vote occurs or how much Representatives denounce the imperfections of the fix, but whether they get a majority to pass it. So it’s a case of ignoring the rhetoric and seeing how many votes there are, and for reasons discussed below they are likely to be there.

The news that would tank markets when they open is the House passing the bill with significant amendments. It is unlikely that Democrats have the votes to significantly amend the bill, so any amendments would come from the Republican side. That would mean another round of voting in the Senate and quite probably an unchoreographed fall over the cliff. Markets would sell off badly on that outcome. House Republicans meet at 1PM before the House reconvenes, so be prepared for a storm of invective.

The Senate voted 89-8 overnight to pass the fiscal cliff fix. The provisions were pretty much as discussed Monday afternoon and a very good summary is found in the Washington Post link.

Technically, the US has gone over the fiscal cliff, as the IRS pointedly indicated early today, so House members will be voting to cut taxes rather than raise them.  So between the dairy fix (which extends dairy subsidies), the Medicare doctor fix, the permanent AMT fix, the unemployment benefits extension fix, the estate tax fix, the capital gains/dividend tax pretty good fix,  and so on, there are enough important Democrat and Republican constituencies that will be severely damaged that the House cannot afford to vote it down. The voting in the House will likely be closer as Representatives who may face a 2014 challenge will be given a pass to show a ‘Demonstration of Character’ but the odds are strong that the votes will be there.

The other reason that Republicans will likely vote ‘yes’ is that the sequester is delayed, not derailed, so those spending cuts will come on line in two months. In the meantime, they are obligated to find some savings elsewhere in the budget to lower spending partially in line with the sequester over the next two months. Combined with the debt ceiling, the republicans will have a couple of bites at the spending apple in coming months, so they are not giving up much by voting ‘yes’ today.


  1. A close vote before 6PM – Asian markets open up, catching up to the Monday S&P move; S&P futures probably have priced in most of the benefit of the fiscal cliff resolution. EUR CAD, and AUD have a bit of catching up to do with the S&P, but there should be little drama
  2. A rancorous debate that extends into the night – again the key will be whether the votes are there, however, reluctantly, but if it looks as if support is waning we will see sharp moves in markets. With brinkmanship the new normal, the sell-off will be partial on the view that a last minute rabbit will be pulled from a hat.
  3. Amendments or rejection – markets will sell off sharply.  If it turns out that the House can’t vote ‘yes’ on an acceptable, yet inelegant fix, the confidence that has emerged in 11th hour fixes will dissipate and tail risk scenarios will shift into baseline outcomes. This would be USDJPY negative,  but risk-correlated currencies now price in 80-90% probably of a successful fix in our view, so the downside pressures will be large.